Higher Rates and Rising Resale Supply Emerge as New Headwinds for Builders
Source: Economics Group of Wells Fargo Bank, N.A.
Summary
New home sales jumped 8.8% to a 693K-unit pace in March, the strongest pace since September 2023. Although the report was accompanied by downward revisions to sales in February, on balance, the pace has strengthened on trend so far to start the year. New home sales should continue to gradually improve with a sturdy macroeconomic backdrop and structural affordability and availability constraints in the resale market remaining as tailwinds. That noted, higher interest rates and rising existing supply could weigh on the new home market moving forward.
New Home Sales Rebound
- New home sales rebounded 8.8% to a 693K-unit pace during March. Even with February sales revised considerably lower, the pace of sales has averaged 667K so far this year, which represents a 4.5% improvement from the pace averaged in the same quarter last year and a 3.5% rise from Q4-2023’s pace.
- The upturn in new home sales over the past year despite higher interest rates largely reflects builders’ ability to offset eroding housing affordability conditions through price discounts, mortgage rate buy-downs and other incentives. A scarcity of available existing homes for sale and emergence of the “build-to-rent” market have been other factors supporting demand.
- These factors have allowed the new home market to digest the higher interest rate environment relatively well. A recent spike in Treasury yields on the back of new inflation and monetary policy uncertainty will test the mettle of both buyers and builders in the months ahead, however.
- During the week ending April 18th, the average 30-year mortgage rate stood at 7.1% according to Freddie Mac, up from 6.9% the previous week.