Despite an unexpected decline in sales of newly constructed single-family homes in the United States in February due to a rise in mortgage rates throughout the month, the underlying trend kept strong amid a persistent shortage of pre-owned homes available for purchase.
The Commerce Department released a report on Monday, revealing that while supply was at its greatest point since November 2022, the median new home price last month was the lowest in over two and a half years. In an effort to make housing more affordable, builders are stepping up construction while also lowering prices, providing incentives, and shortening floor plans.
Conrad DeQuadros, a senior economic advisor of Brean Capital, said that the housing market is stabilizing as homebuilders seem to be building less costly, and hence probably smaller, homes. Prices have been declining at mid-single-digit rates year over year, while sales have been comparatively steady at December's level for the past two months.
New home sales fell 0.3% in February to a seasonally adjusted annual pace of 662,000 units, reported the Census Bureau of the Commerce Department. The sales pace in January has been revised upward to 664,000 units from the earlier announced 661,000 units.
New house sales, which make up 13.1% of all home sales in the United States, were expected to increase to 675,000 units, according to economists surveyed. As new home sales are recorded at the time a contract is signed, they serve as an early warning system for the housing market. On the other hand, they can fluctuate from month to month. In February, year-over-year sales increased by 5.9%.
Due in large part to a lack of previously owned homes for sale, the new home market has outperformed the Fed's 525 basis point raise in interest rates since March 2022.
With home resales reaching a one-year high in February, it appears that the housing sector as a whole has turned the corner. However, there is still a shortage of supply, which keeps housing costs high and home-ownership out of reach for many.
Data from mortgage finance company Freddie Mac shows that the average rate on the widely used 30-year fixed-rate mortgage increased to 6.94% in late February and then decreased to just under 7.0% by mid-March. It is expected that the US central bank will begin reducing interest rates later this year.
There was a decline in Wall Street stock prices. The dollar increased against a group of currencies. Prices for US Treasuries decreased.
Positive outlook
In the Northeast, new house sales fell 31.5 percent last month, and in the Midwest, they fell 24%. In the West, sales rose 2.3%, and in the heavily populated South, they jumped 3.7%.
Notably, mortgage rates increased to 7.0% from 6.8% in the same month, which likely discouraged some purchasers from joining the market, according to Capital Economics property expert Thomas Ryan. He is optimistic about new house sales over the coming years.
According to a study conducted by the National Association of Home Builders this week, a measure of sales over the following six months increased to a nine-month peak in March. Prospective buyer activity was at its highest level since August of last year.
In February, the median price of a new home was $400,500, which was 7.6% less than a year earlier and the lowest level since June 2021.
The drop in the median new home price was welcomed by economists as a positive sign for inflation and affordability. A large portion of the inflation increase can be attributed to housing and its rising rental rates.
However, because of the shortage of available inventory in the market for resale homes, overall house prices are still rising.
The majority of newly constructed homes that were sold in the previous month fell between $300,000 and $399,000. The government said last week that February had the highest number of house completions in 17 years. There will soon be a greater supply of newly constructed homes, which could slow the rise in home prices.
The number of newly constructed homes available on the market at the end of February was 463,000, the highest since November 2022. Compared to 457,000 units in January, that was an increase. It would take 8.4 months — up from 8.3 months in January — to sell all of the homes on the market at the current sales pace in February.
In stock, 58.7% of the homes were still under construction. Only 18.4% of the supply consisted of completed homes, with the remaining 22.9% yet to be built.
According to Daniel Vielhaber, an economist of Nationwide, builders' rate incentives can still help buyers by reducing their financial burden and increasing the appeal of new houses, but it's unclear how long these incentives will be available.