Sales of new single-family homes in the United States (U.S.) experienced in March a rebound after a downward revision in February. This recovery was driven by the persistent shortage of previously owned homes available for sale. However, the resurgence in mortgage rates could potentially hinder the momentum of the market.
According to a report from the Commerce Department, the median house price also increased to a seven-month high compared to February. This rise is likely due to fewer builders offering price cuts and a shift in sales towards higher-priced homes. The combination of increasing prices and mortgage rates may make housing even more unaffordable, particularly for first-time buyers.
Oliver Allen, senior U.S. economist at Pantheon Macroeconomics, noted that new home sales have remained remarkably strong recently. However, he believes that the rise in mortgage rates and decline in mortgage applications over the past couple of months will likely cause new home sales to stagnate at best in the near term, while existing home sales will decrease.
Expectations exceeded
The Commerce Department’s Census Bureau reported that new home sales surged by 8.8 percent to a seasonally adjusted annual rate of 693,000 units last month, marking the highest level since September. The sales pace for February was revised down to 637,000 units from the previously reported 662,000 units.
Economists surveyed by Reuters had predicted that new home sales, which account for approximately 14 percent of U.S. home sales, would increase at a rate of 670,000 units. New home sales are considered a leading indicator of the housing market and are counted at the signing of a contract. However, they can be volatile on a month-to-month basis. On a year-on-year basis, sales rose by 8.3 percent in March.
Impact of rising mortgage rates on new housing market
Although the new housing market continues to benefit from the shortage of previously owned homes for sale, rising mortgage rates are impacting affordability. Data from last week revealed a decline in single-family housing starts and building permits in March. The sentiment among single-family homebuilders remained unchanged in April, with the National Association of Home Builders observing that buyers are hesitant until they have a better understanding of where interest rates are heading.
According to data from mortgage finance agency Freddie Mac, the average rate on a 30-year fixed-rate mortgage has risen above 7 percent, supported by positive reports on the labor market and inflation. This suggests that the Federal Reserve may postpone an expected interest rate cut this year. Some economists doubt that the U.S. central bank will reduce borrowing costs in 2024.
Strong growth in new home sales across four regions
New home sales increased in all four regions last month, with the Northeast experiencing a surge of 27.8 percent. Sales in the Midwest grew by 5.3 percent, while the densely populated South saw an increase of 7.7 percent. In the West, sales vaulted by 8.6 percent. Despite the decline in permits in March, economists believe that residential investment picked up in the first quarter after a significant slowdown in the October-December period.
The government is scheduled to release its report on the first-quarter gross domestic product (GDP) on Thursday. Growth estimates for the period range as high as a 3.1 percent annualized rate. In the fourth quarter, the economy grew at a pace of 3.4 percent.
Rising house prices amid supply shortage
Due to the supply shortage in the home resale market, overall house prices continue to rise. Fannie Mae, a mortgage finance agency, reported that house prices increased by 7.4 percent year-on-year in the first quarter, compared to a 6.6 percent rise in the fourth quarter. Fannie Mae has upgraded its estimate for home price growth this year from 3.2 percent to 4.8 percent.
At the end of March, there were 477,000 new homes on the market, up from 465,000 units in February. Based on the sales pace in March, it would take 8.3 months to clear the supply of houses on the market, a decrease from 8.8 months in February. Houses under construction accounted for 59.1 percent of the inventory, while homes yet to be built made up 22.2 percent of the supply, and completed houses accounted for 18.7 percent.
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