Sales of new U.S. homes unexpectedly dropped in August as a spike in mortgage rates weighed heavily on consumer demand.
New single-family home purchases plummeted 8.7% to a seasonally adjusted annual rate of 675,000 units, the Commerce Department reported Wednesday. Economists surveyed by Refinitiv expected new home sales – which account for a small percentage of total sales – to come in at a rate of 700,000 units.
Sales remain up about 5.8% from the same time one year ago.
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“The pace of new home construction is slowing, but there is still a large backlog of homes in the funnel that should continue making their way to the market in the coming months, giving more opportunities for home buyers to jump on the new construction train,” said Nicole Bachaud, Zillow senior economist.
At the current pace of sales, it would take roughly 7.8 months to exhaust the inventory of existing homes. Experts view a pace of six to seven months as a healthy level.
The decline in sales indicates that a resurgence in mortgage rates is pushing many would-be buyers out of the market. That slowdown in demand contributed to a decline in prices last month.
The median price for a new home fell to $430,000 from $436,700 the previous month. Still, that remains far higher than the typical pre-pandemic level.
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The Federal Reserve’s aggressive interest-rate hike campaign sent mortgage rates soaring above 7% last year for the first time in nearly two decades, cooling the red-hot housing market.
Rates on the popular 30-year fixed mortgage are currently hovering around 7.19%, according to Freddie Mac, well above the 6.29% rate recorded one year ago and the pre-pandemic average of 3.9%.
With rates slow to retreat, sellers who locked in a low mortgage rate before the pandemic have been reluctant to sell and buy another house at a steeper borrowing price.
The lack of inventory has weighed on existing home sales, in particular.
Sales of previously owned homes slid 0.7% in August from the previous month to an annual rate of 4.04 million units, according to data released last week by the National Association of Realtors (NAR).
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On an annual basis, existing home sales are down 15.3% when compared with August 2022.
“All of the momentum for the housing market early in 2023 has evaporated in the face of rising mortgage rates,” said Ben Ayers, Nationwide chief economist. “Overall demand for single-family homes has cratered as the burden of a mortgage payment climbs to unsustainable levels.”