Sales of newly constructed single-family homes in the United States fell more than expected in April, as rising mortgage rates and higher home prices continued to dampen demand. According to data from the U.S. Commerce Department, new home sales decreased by 4.7% to a seasonally adjusted annual rate of 634,000 units, a significant drop from March's revised rate of 665,000 units.
Economists had forecasted new home sales to decline to a rate of 679,000 units. However, the actual figures were even lower, reflecting the challenges faced by the housing market in the second quarter. The downturn in new home sales is attributed to a resurgence in mortgage rates and the increasing cost of homes, which together have eroded the affordability for many potential buyers.
The decline in new home sales was not uniform across the United States. The Northeast experienced the most significant drop, with sales plunging 20.9%. The West saw a 7.3% decrease, and the densely populated South reported a 4.8% decline. Interestingly, the Midwest was the only region to see an increase, with sales rising by 10%.
New home sales are a critical indicator of the housing market's health, as they are recorded at the signing of a contract, making them a leading indicator. However, these figures can be volatile on a month-to-month basis. On a year-over-year basis, sales fell by 7.7% in April.
The average rate on a 30-year fixed-rate mortgage climbed back above 7% in April, according to data from mortgage finance agency Freddie Mac. This increase in borrowing costs has sapped momentum from the housing market. The National Association of Realtors reported a drop in existing home sales in April, and government data showed declines in single-family housing starts and building permits.
Builders have attempted to mitigate the impact of higher mortgage rates by constructing smaller homes and offering incentives to buyers. Despite these efforts, the median price of a new home rose by 3.9% from a year ago, reaching $433,500 in April. Most of the new homes sold were in the $300,000 to $499,999 price range, indicating that the market remains skewed towards higher-priced homes.
At the end of April, there were 480,000 new homes on the market, up from 470,000 in March. At the current sales pace, it would take 9.1 months to clear this inventory, up from 8.5 months in March. This increase in supply indicates that builders are still active, but the higher prices and mortgage rates are limiting the pool of potential buyers.
The rise in new home prices and mortgage rates has also impacted affordability. In the first quarter of 2024, 38% of a median household income was required to make the mortgage payment on a median-priced new single-family home, according to a new index from the National Association of Home Builders (NAHB) and Wells Fargo. For low-income families, this figure jumps to 77% of their earnings.
The higher costs for land, labor, and materials mean that builders are constrained in their ability to lower prices. Larger builders like DR Horton and Toll Brothers have managed to report strong earnings by leveraging their scale to buy down mortgage rates and maintain demand, but the overall market remains below the five-year average for new home sales.
Robert Dietz, NAHB's chief economist, emphasized the need for policy changes to address the housing shortage. "With a nationwide shortage of roughly 1.5 million homes, the lack of housing units is the primary cause of growing housing affordability challenges," Dietz said. He called for faster permit approvals, resources for skilled labor training, and improvements in building material supply chains to help alleviate the housing crisis.
