If I Had a Hammer: Surprising Twists in the New Home Sales Market

From The Wall Street Journal:

In a positive turn of events, the highest mortgage rates in decades have had a surprising benefit to a segment of the U.S. economy.

New Home Sales are on the Upswing

According to the Commerce Department's report, July witnessed the sale of a seasonally adjusted 714,000 new homes, surpassing the 684,000 in June and the 543,000 from the previous July.

Though far from the 1.03 million sales recorded in August 2020, during a housing boom, this pace exceeds the pre-pandemic figures of 2019 when 683,000 new homes were sold.

Remarkably, this upswing is happening in a period of rising borrowing costs. The Mortgage Bankers Association noted that the average rate for a 30-year fixed mortgage reached 7.31%, the highest since December 2000. Comparatively, the rate was 5.65% in the same week last year and around 3% two years ago.

What is Causing the Upswing in New Home Sales?

One reason behind the resurgence in new-home sales is buyers adjusting to the idea of higher rates.

Another factor is that existing homeowners, who are paying much lower rates than the prevailing ones, are hesitating to move. This scarcity of supply in previously owned homes for sale has weighed heavily on the market. The National Association of Realtors reported a historic low of 980,000 existing single-family homes for sale in July. This shortage has bolstered prices.

This scarcity of existing homes has fueled demand for new ones. Despite the recent rate increases, this demand seems to persist. Toll Brothers, a home construction company, indicated that the typical decline in demand from July to August has been milder this year.

However, high rates are locking many existing homeowners into their current homes, limiting their mobility and potential for pursuing new opportunities, such as the purchase of a new build which may eventually affect that segment of the housing market. A Final Thought

While lower rates would strengthen the housing market and the overall economy, the resilience demonstrated under the weight of high rates is remarkable.