The latest data from the Census Bureau reveals a significant downturn in the sales of newly constructed homes, marking a notable setback for the housing market. According to the report released on Tuesday, home sales plummeted by 8.7%, equating to a seasonally adjusted rate of 675,000 units for the month of August. This decline starkly contrasts with the revised July rate of 739,000 units, indicating a far more substantial drop than anticipated by Bloomberg’s consensus, which projected a modest 2.2% monthly decrease to 698,000 units.
Despite this downturn, sales maintained a pace that was 5.8% above levels recorded in the same period last year.
The sudden dip in activity paints a contrasting picture to the prosperous year enjoyed by homebuilders thus far. It highlights the pervasive influence of elevated mortgage rates on all segments of the housing market, despite enticing incentives.
Keith Gumbinger, Vice President of HSH.com, noted, “Tight inventories of existing homes for sale have pushed some buyers toward the new construction market. That said, that market is, of course, also affected by uncertainty and higher financing costs, although builder incentives can help offset these to some degree… Builders may have a bit more of the blues in September because building activity slowed in August.”
The spike in mortgage rates during August, culminating in a 22-year high of 7.23% according to Freddie Mac, is pinpointed as a key factor contributing to the drop in new home sales. Experts suggest that rates are poised to remain above the 7% threshold for the foreseeable future.
The surge in rates has reverberated through the resale market, causing a notable slump in sales of previously owned homes. National Association of Realtors Chief Economist Lawrence Yun reported that August saw the lowest sales figures for this category since 2010, experiencing a 15.3% decline year over year. This sluggish pace also ranks as the third slowest in the current housing cycle.
Furthermore, rising rates have deterred homeowners from listing their properties, further exacerbating the scarcity of existing homes in the market. While this trend initially buoyed sales in the new home market, it appears that the continuing rise in mortgage rates has altered the landscape dramatically.
“In the short run, it’s possible that rates may go up to 8%,” Yun cautioned.
This prospect places increased pressure on homebuilders to extend incentives to seal deals, a practice already underway.
For example, D.R. Horton (DHI) presently offers a limited-time opportunity to lock in a 30-year fixed rate on select government-backed home loans as low as 5.50% for homes sold up to $371,015, and a loan amount of $364,295.
In September, 32% of builders implemented price reductions, an uptick from 25% in August. According to the National Association of Home Builders (NAHB), this represents the largest share of builders offering price cuts since December 2022, when that figure reached 35%. The average price discount recorded was 6%.
While the median sales price of newly sold homes in August dipped to $430,300 from July’s average of $436,700, the average sales price was $514,000, a slight increase from the preceding month’s average of $513,000.
In a bid to counteract the impact of rising rates, 59% of builders extended various forms of sales incentives in September — a figure not seen since April 2023.
Despite these efforts, homebuilders find themselves increasingly pessimistic about market conditions.
The NAHB/Wells Fargo Housing Market Index reveals that this month, more homebuilders perceive housing conditions as poor compared to good, marking the second consecutive month of dwindling confidence in September.
The index gauging current sales conditions fell to 51 in September from 57 the previous month, while sales expectations for the next six months dwindled by 6 points to 49 in September. Prospective buyer traffic also experienced a five-point drop to 30.
“High mortgage rates are clearly taking a toll on builder confidence and consumer demand, as a growing number of buyers are electing to defer a home purchase until long-term rates move lower,” commented NAHB Chief Economist Robert Dietz in a statement.
In conclusion, the substantial decline in new home sales in August, coupled with the persistent challenge of escalating mortgage rates, underscores the evolving dynamics of the housing market and its impact on builder confidence and consumer demand.
Source: Yahoo Finance
