October Sees Decline in New Home Buyers Due to High Mortgage Rates

Increased mortgage rates dampened the demand for newly constructed homes in October.

The Census Bureau reported a 5.6% drop in new home sales, reaching 679,000 units last month, down from September’s 719,000 units, significantly below the Bloomberg consensus estimate of 725,000 for October. Despite this, sales still showed a 17.7% increase compared to the previous year.

The decline in sales likely stems from the spike in late summer mortgage rates, leading to cautiousness among budget-conscious buyers. RSM US real estate senior analyst Crystal Sunbury anticipated the decline in October’s data due to contracts made during the period of rising rates in August and September. Sunbury forecasts a potential rebound in new home sales by December as mortgage rates have begun to ease after peaking at 7.79% in October, dropping by half a point so far in November after four consecutive weeks of decline.

Similarly, higher borrowing costs impacted existing home sales, dropping 4.1% month-over-month in October and 14.6% compared to the prior year, as reported by the National Association of Realtors (NAR).

The shortage of resale inventory has contributed to this sales decline, with many homeowners holding onto their properties to maintain their existing low mortgage rates. NAR data revealed a low inventory of previously owned homes for sale, totaling 1.15 million units, the lowest since 1999.

This limited inventory had boosted new home sales this year, despite the rising mortgage rates. Builders attempted to bridge this gap in inventory, with 439,000 new houses available for sale by the end of October, providing a 7.8-month supply at the current sales pace.

Public homebuilders have been offering below-market-rate home loans to alleviate the impact of higher rates. For instance, PulteGroup in Santa Fe, N.M., is offering a 30-year fixed rate of 5.75% in new communities. However, smaller builders faced challenges, lacking the financial resources to match the mortgage rate buydowns of larger companies. The data from the National Association of Home Builders showed an increase in smaller builders reducing home prices to 36% in October from 32% in the preceding months, marking the highest share during this cycle.

The median sales price of new homes dropped to $409,300 in October, down from $422,300 the previous month, while the average sales price decreased to $487,000, lower than September’s revised figure of $515,400.

The October BTIG/HomeSphere survey of 75 to 125 small and mid-sized builders highlighted a worsening trend in sales and traffic despite favorable year-over-year comparisons, signaling a sluggish demand for new homes among private builders.