New-Home Sales Stall: Rising Rates to Blame?

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Single-family new-home sales took an unexpected turn in July, dropping to its lowest level in nine months, the Commerce Department reports. Sales fell 13.4 percent to an annual rate of 394,000 units.

Economists blame the recent surge in mortgage rates. 

"The drop-off in sales in July is in part a reflection of buyers' reaction to the recent uptick in mortgage rates as people reassess their budgets to determine how much house they can afford," says Rick Judson, chairman of the National Association of Home Builders. "Consumers just need a little time to adjust to the new parameters of the market."

The Fed has said it would soon taper its bond-buying program, a stimulus program that has kept interest rates near or at record lows. Since May, as fears mount the program will soon end, mortgage rates have been on the rise. Mortgage rates surged to a 2-year high last week, with the 30-year fixed-rate mortgage averaging 4.58 percent, according to Freddie Mac

New-home sales by region, according to the Commerce Department:

  • West: -16.1%
  • South: -13.4%
  • Midwest: -12.9%
  • Northeast: -5.7%

The median price for a new-home sale rose to $257,200 — a rise from $237,400 a year ago. 

Builders have ramped up construction on new homes the past year, with inventories increasing 4.3 percent from June to July. 

“Rising inventories could slow the rapid and arguably unsustainable price gains seen over the past year,” Reuters reports. “If that occurred in step with a moderate rise in interest rates, the overall housing market could become healthier in the long term.” 

Meanwhile, existing-home sales surged to a three-year high last month, according to the National Association of REALTORS®.

Some economists expect new-home sales to increase as well, and that the latest numbers are just a temporary blip. 

"There is still a great deal of pent-up demand for homes in markets nationwide, and builders continue to report improving consumer interest,” says NAHB Chief Economist David Crowe. “This suggests that what we're seeing is a temporary pause, and that buyers will return to the market once they are confident that the higher mortgage rates are here to stay."

Source: National Association of Home Builders and “U.S. New Home Sales Fall Sharply; House Prices Rise,” Reuters (Aug. 23, 2013)

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