October's mortgage rate jump to near 8% triggers a slowdown
New home sales experienced a downturn in October, as mortgage rates – the highest in 23 years – dampened buyer demand.
The Census Bureau reported that sales of new single-family houses in October were at a seasonally adjusted annual rate of 679,000, marking a 5.6% decrease from September’s revised rate of 719,000. Despite this monthly drop, the sales were 17.7% higher compared to October 2022.
“Fewer people bought new homes in October as would-be buyers postponed their purchases in hopes that mortgage rates would drop,” said Holden Lewis, home and mortgage expert at NerdWallet.
Lewis also noted a shift in the market, with a higher percentage of homes being sold at more affordable price points compared to the previous year.
The median sales price for new houses sold in October was $409,300, with an average sales price of $487,000, according to the latest new residential sales report. The estimated number of new houses for sale at the end of October was 439,000, which equates to a 7.8-month supply at the current sales rate.
First American economist Ksenia Potapov observed, “Historically, the median sale price of a new home has been higher than that of an existing home, but that spread has steadily declined this year as the ‘rare and elusive’ existing home for sale keeps getting more expensive. A new home provides a good alternative.
“Builders have been able to attract buyers from the existing home market with incentives that have created affordability relative to existing homes. According to NAHB, 36% of builders reported cutting home prices in November, and 60% of builders provided sales incentives of some kind.”
Potapov also highlighted the ongoing challenge of delivering completed homes, noting that only 17% of the total new-home inventory for sale in November was completed, down over 20% from pre-pandemic levels.
Gregg Logan, managing director at RCLCO, linked new home sales with job growth and the overall economy.
“The strength of market demand for new homes tends to move in sync with job growth and the overall economy,” he said. Logan mentioned that slowing job growth and high mortgage rates have posed challenges, but he remains optimistic about the prospects for the new home market in the latter half of 2024.
“Strong demographic fundamentals and expected stronger job growth suggest new home sales could accelerate further by mid to late 2024 or early 2025,” Logan added. “That doesn’t mean we won’t see some slowing in the interim. The important thing is to make decisions based on long-term, not short-term trends, rather than overreact and miss opportunities.”
Fannie Mae chief economist Doug Duncan weighed in, projecting a further softening in new home sales toward the year’s end but expecting the decline to be moderate.
“We expect new home sales to soften further over the remainder of the year, but with mortgage rates recently pulling back somewhat, we don’t expect the decline to be large,” Duncan said. “We believe the ongoing lack of existing homes available for sale will continue to support demand for new homes.”
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