America's new home market continues to struggle under the weight of sharply rising mortgage rates, with builder price cuts and incentives failing to meaningfully revive demand.
Government data released Tuesday showed that sales of newly built single-family homes fell 0.6% in September from the prior month to a seasonally adjusted annual rate of 676,000, exceeding the median estimate of 651,000 from economists surveyed by Bloomberg.
At the same time, the median sale price of new homes dropped 3.9% year-over-year to $400,400, with seven of the nine months so far this year recording annual price declines.
Mortgage rates climbed by roughly half a percentage point last month and touched their highest level in nearly three years in early October before edging only slightly lower since. This rapid escalation in financing costs is eroding the willingness of prospective buyers to purchase and has dragged a measure of builder confidence down to its lowest point in 14 years.
Price Cuts and Concessions Cannot Offset Rate Shock as Market Lacks Genuine Demand
Daniel Vielhaber, an economist at Nationwide, noted that builders are being forced to make greater efforts to attract buyers, and elevated mortgage rates are expected to keep weighing on the sales environment at least through the end of the year.
"Price reductions and mortgage rate buydowns help keep sales moving, but the market is relying more on builder concessions than on strong organic demand for support," Vielhaber said in a research note.
Against a backdrop of persistently soft demand, builders are still making slow progress in working down their inventory.
The inventory of unsold new homes fell 2.3% from a year earlier to 476,000 in September, equivalent to 8.4 months of supply at the current sales pace. While that is the lowest level of the year, it remains well above the historical norm seen before the pandemic.
Entry-Level Segment Under Pressure as Builders Turn to Smaller Homes and Rate Buydowns
Drew Reading, an analyst at Bloomberg Intelligence, said in a research note last week that entry-level buyers are especially sensitive to rising financing costs, and builders serving primarily this group, such as D.R. Horton Inc. and Meritage Homes Corp., face greater exposure.
Builders are striving to keep customers interested by offering smaller homes and subsidizing mortgage rates to ease affordability constraints.
It is worth noting that new home sales data is based on contract signings and is regarded as a more timely leading indicator of the market than existing home sales, which are counted at closing. However, the data is highly volatile month to month. According to the government report, the 90% confidence interval for the change in September new home sales ranged from a decline of 14.4% to an increase of 13.2%, calling for caution when interpreting the figures.
By region, the South, the nation's largest market for new home sales, saw its annualized sales pace fall 6.6% to 413,000 in September, while sales in the Midwest also declined, partially offsetting gains in the West and Northeast.
Comments