A bright spot in a sluggish market: New homes are hot
New home sales jumped 10.6% in July as builders took advantage of lower mortgage rates and used incentives to close deals.
Homebuilders benefited from the drop in mortgage rates last month, posting a surprise increase in sales.
New home sales jumped 10.6% in July compared to June and were up 5.6% year-over-year, according to the U.S. Census Bureau. The drop in mortgage rates, along with builders' willingness to offer concessions, helped buyers overcome affordability issues, said Lisa Sturtevant, chief economist at Bright MLS.
According to the National Association of Home Builders, builders used incentives with gusto. They reported using them 64% of the time — the highest level since April 2019.
Price growth constrained due to glut of inventory: The median price for new homes sold in July was $429,800, which was significantly higher than in May and June, but down from the March peak of $436,400.
The supply of new homes remains elevated, so builders still need to compete for buyers, which will keep a lid on price growth, said Odeta Kushi, deputy chief economist at First American.
Broken down by region, the Midwest posted the biggest jump in sales, according to the NAHB, with a 22.1% increase year-over-year. Increases were also seen in the West (up 6.1%) and the Northeast (up 5.4%), while new home sales were down 2.4% in the South.
New home sales represent a small piece of the pie when compared to existing home sales, which remain tepid. Still, the two market segments intersect, and if existing home inventory continues to rise, "the landscape might be changing for the new home segment of the market," Sturtevant said, noting that buyer interest in new homes could soften.
Rate cuts could help unleash demand: The big question now is how potential homebuyers will react when the Federal Reserve begins cutting interest rates, something that could start next month.
That expectation was bolstered on Aug. 23, when Fed Chairman Jerome Powell said "the time has come for policy to adjust," adding that the pace of rate cuts will depend on incoming data.
Molly Boesel, principal economist at CoreLogic, believes there is a large pool of buyers waiting for the Fed to act.
"There is a lot of pent-up demand from potential homebuyers waiting for that cut to make an offer. Once that happens, sales will begin to move upwards slowly," Boesel said.