Despite higher interest rates last month, new home sales saw an unexpected rise in March due to limited inventory of existing homes. However, the pace of new home sales is expected to face pressure in April as mortgage rates have moved above 7% this month. This increase is anticipated to moderate sales and push builders to use more sales incentives this spring.
March Sales Performance
According to newly released data from the U.S. Department of Housing and Urban Development and the U.S. Census Bureau, sales of newly built, single-family homes in March rose 8.8% to a seasonally adjusted annual rate of 693,000 units from a downwardly revised reading in February. This pace is up 8.3% compared to the same period last year.
"Although consumer demand has been somewhat dampened due to higher interest rates, builders continue to supply new homes to the market to lift inventory to make up for the low resale supply," said Carl Harris, chairman of the National Association of Home Builders (NAHB) and a custom home builder from Wichita, Kansas. "Rates moving above 7% however, will move some home buyers to the sidelines as the spring progresses."
The Impact of Higher Mortgage Rates
NAHB Chief Economist Robert Dietz emphasized the significance of increasing housing supply to address shelter inflation and lower interest rates. "Shelter inflation remains the largest, lingering obstacle to lower inflation. More housing supply will ultimately tame shelter inflation growth and lower interest rates. This will improve the cost of financing for land developers and home builders and enable more attainable housing supply."
Understanding New Home Sales
A new home sale occurs when a sales contract is signed or a deposit is accepted. The home can be in any stage of construction: not yet started, under construction, or completed. The March reading of 693,000 units represents the number of homes that would sell if this pace continued for the next 12 months, adjusted for seasonal effects.
Inventory and Prices
In March, new single-family home inventory remained elevated at 477,000 units, up 2.6% from February. This represents an 8.3 months' supply at the current building pace, supported by the ongoing shortage of resale homes. In contrast, data from the National Association of Realtors indicate just a 3.1 months' supply of existing single-family homes in March, with a balanced market typically having a 5 to 6 months' supply. The inventory of newly built single-family homes is up 10.2% year-over-year.
The median new home sale price in March was $430,700, up nearly 6% from February, though down 1.9% compared to a year ago.
Regional Performance
Regionally, new home sales on a year-to-date basis show varied performance across the country:
- Northeast: Up 15.1%
- Midwest: Up 17.8%
- West: Up 28.1%
- South: Down 6.6%
While new home sales experienced a boost in March, the rise in mortgage rates to above 7% in April is likely to temper this growth. Builders are expected to increasingly offer sales incentives to attract buyers amidst affordability challenges. The continued efforts to increase housing supply will be crucial in addressing shelter inflation and stabilizing the market for both homebuyers and builders.
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