Sales of new homes in August fell by 8.7% from July, marking the slowest pace since March with 675,000 units, according to newly released data by the U.S. Department of Housing and Urban Development and the U.S. Census Bureau. Even with this decline, it's still a 5.8% increase from last August, showcasing the market's unpredictable nature.
Impact of Rising Interest Rates
It's no secret the housing market is struggling with the repercussions of higher interest rates and limited funds available for buyers and builders. The Census data, which is based on the number of contracts signed in a month, highlights the big changes in mortgage rates seen in August. By the end of the month, the average rate for a 30-year fixed loan went up to 7.48%, from 7.04% at the end of July, according to Mortgage News Daily.
Alicia Huey, chairman of the National Association of Home Builders (NAHB), highlighted that builders continue to play tug of war with supply concerns in a market characterized by poor levels of housing affordability. "Higher interest rates not only price out demand, as seen in August, but also increase the cost of financing for builder and developer loans."
Builders Strategies and Market Adaptation
In response to the evolving market dynamics, builders are using various strategies to lessen the impacts of rising interest rates and sustain demand.
Mortgage Rate Buy-Downs
One popular strategy is buying down mortgage rates. In this approach, builders pay lenders a lump sum to secure a lower interest rate for the buyer. Rate buy-downs are particularly beneficial in the current market, where higher interest rates make it harder for people to qualify for a home. In conjunction with this, 32% of builders are using price reductions averaging around 6% to attract more buyers.
Shift Towards Smaller Homes
Some builders have started focusing on smaller, more affordable homes due to the demand from first-time buyers. Ali Wolf, the chief economist at Zonda, says home sizes across the country have shrunk by 10% between August 2018 and August 2023.
This trend is prominent in growing cities like San Antonio, Charlotte, and Raleigh. Earlier this year, Lennar Homes started construction on a community near Converse, TX, where houses, varying in size from 350 to 660 square feet, are priced between $150,000 and $170,000. This shift is a direct response to the surge in housing costs, where houses once valued at $300,000 are now approaching values of $400,000. By the end of August, the median price for a newly constructed home settled at $430,000.
When we look at different regions, we see diverse trends in new home sales in comparison to last August. Sales have gone up by 4.8% in the Northeast, 4.4% in the Midwest, and 1.9% in the South. But in the West, where it's often harder to afford a home, sales have gone down a bit by 0.5%.
In August, the market had 436,000 single-family homes listed. Given the current construction pace, this inventory is projected to last approximately 7.8 months, which is a balanced supply level. Newly constructed homes made up 31% of all available homes for sale, and close to 16% of total home sales in August were new constructions, signaling a strong presence in the market. However, NAHB Chief Economist Robert Dietz points out, "In this environment of escalating rates, builders are exercising increased caution in managing their inventory," likely due to the uncertainties and potential risks stemming from market fluctuations and supply chain disruptions.