Newly released census data for July shows that the demand for new homes has remained strong, reaching its highest level since February 2022. Despite the impact of higher mortgage rates, prospective buyers are eagerly seeking more options in a housing market with limited existing home supply.
In July, the seasonally-adjusted annual rate of newly built single-family homes sold reached 714,000, marking a significant 31.5% increase compared to the previous year and a 4.4% increase from June.
It’s important to note that the new home sales data, which is based on contract signings, cannot be directly compared to the existing-home sales numbers published by the National Association of Realtors. Nevertheless, when combined with leading data, it paints a less optimistic picture of the existing home market, which typically represents the majority of home sale activity.
Sales of pre-owned homes experienced a decline in July, reaching the lowest levels since January due to rising mortgage rates. Unfortunately, August isn’t showing signs of improvement either. According to leading mortgage application data, the Mortgage Bankers Association reports that their index tracking applications for home purchase loans has fallen to its lowest level since April 1995. This decline coincides with mortgage rates reaching their highest level in over two decades.
Mortgage Bankers Association Deputy Chief Economist Joel Kan expressed concern over the impact of the elevated rate environment on home buyers, leading to a decrease in purchasing power. Additionally, the limited housing supply has contributed to the high home prices in many markets, further challenging buyers’ affordability.
The combination of higher mortgage rates and stronger existing-home prices has created a dual pressure for those looking to buy a house. July saw an increase in the median sale price for existing homes in three of the nation’s four regions, while prices remained flat in the west, according to National Association of Realtors data.
Mortgage Rates Reach Highest Levels in Decades
Mortgage rates have recently surpassed 7%, reaching the highest levels seen in decades. According to Freddie Mac, the weekly mortgage rate climbed to 7.09%, marking the highest level since 2002. Daily measurements indicate that rates have continued to rise in tandem with the increase in the 10-year Treasury yield earlier this week. On Tuesday, Mortgage News Daily reported the 30-year fixed rate mortgage at 7.49%.
Implications for Home Builders
Interestingly, this imbalance in mortgage rates has proven advantageous for home builders, as indicated by census data. Luxury builder Toll Brothers (ticker: TOL) announced earnings of $3.73 per share on approximately $2.7 billion in revenue for its third quarter. These figures outperformed analyst predictions, which estimated earnings at $2.85 per share on revenue of roughly $2.4 billion. Toll Brothers attributed its success, in part, to the robust market for newly-built homes, as the inventory of previously owned homes remained low.
Reluctance of Existing Homeowners
The reluctance of existing homeowners to give up their low-rate mortgages has contributed to this phenomenon. This sentiment was expressed by Douglas C. Yearley, Jr., Chairman and CEO of Toll Brothers, during a Wednesday morning call with investors. He stated, “While rising rates remain a challenge for the overall industry, they further cement the lock-in effect.”
Impact on New Home Sales
Although new home sales have benefitted thus far from the lock-in effect, Robert Dietz, Chief Economist at the National Association of Home Builders, believes that the trend may be waning due to multidecade high rates. In a Wednesday blog post, he explained, “New home sales were solid in July because of an ongoing housing deficit in the U.S. and a lack of resales stemming from many homeowners electing to stay put to preserve their low mortgage rates. However, despite this monthly uptick, new home sales will likely weaken in August as higher interest rates price out prospective buyers.”
