Sales of new U.S. homes have hit a 5-month low due to sky-high mortgage rates, which continue to strain prospective homebuyers’ ability to afford a dwelling. According to the Department of Commerce, the pace of new home sales slowed by 8.7% in August compared to the previous month, reaching a seasonally adjusted annual rate of 675,000 properties. This figure fell short of economists’ expectations of reaching 700,000 homes.
The chief economist at Bright MLS, Lisa Sturtevant, stated that homebuilders are still benefiting from the low inventory of existing homes for sale, which has driven more buyers to consider new construction. However, with mortgage rates elevated and home prices high, affordability has become a growing concern for homebuyers. Mortgage rates are currently near a 23-year high, surpassing 7% in August for the first time since November and remaining above that threshold since then, according to mortgage buyer Freddie Mac.
The impact of high mortgage rates adds hundreds of dollars a month in costs for borrowers, limiting how much they can afford in a market that is already unaffordable for many Americans. Despite this, new home sales have increased by 1.8% in the first eight months of this year compared to the same period in 2022. In contrast, sales of previously occupied U.S. homes have declined by 21% during the same period.
To mitigate the impact of elevated mortgage rates on their sales, homebuilders have been lowering prices and offering incentives such as paying buyers’ closing costs or buying down the rate on their mortgage. Additionally, the declining inventory of previously occupied homes, which has fallen to a near-historic low of 1.1 million properties, has attracted more buyers to new construction.
Nevertheless, current mortgage rates represent an affordability hurdle that many house hunters are increasingly unable or unwilling to take on. This reality has been reflected in the builder confidence index of the National Association of Home Builders (NAHB), which fell below 50 for the first time since April. Builders’ expectations for sales over the next six months have also declined sharply. Readings below 50 indicate negative sentiment about the housing market.
While some homebuilders were able to offset the increase in mortgage rates last month with rate buydowns and other incentives, rates continued to climb in September. This suggests a further weakening of new home sales this month, according to Robert Dietz, the chief economist for the NAHB. Prospective homebuyers will need to carefully assess their affordability options in light of persistently high mortgage rates.