High Mortgage Rates Continue to Weigh on Sales
Source: Economics Group of Wells Fargo Bank, N.A.
Summary
New Home Market Softening as Rates Restrict Activity
New home sales fell 11.3% to a 619K-unit pace in May, the weakest pace since November 2023. The new home market has softened recently alongside higher mortgage rates, increased availability of existing homes and a more moderate pace of economic growth. Although these factors are likely to remain as a constraint moving forward, an uptick in mortgage applications for purchase so far in June suggests that the small dip in mortgage rates over the past several weeks will translate to a slightly stronger pace of home sales in coming months.
Looking further ahead, the Federal Reserve appears poised to initiate a rate cutting cycle later this year, which should help mortgage rates fall further. While lower rates likely will help improve affordability conditions for buyers and make pricing incentives less of an imperative for home builders, a deteriorating macroeconomic backdrop marked by higher unemployment and slower income growth will likely continue as headwinds for the new home market.
New Construction Falls Victim to Higher Rates
- New home sales plunged 11.3% in May to a 619K sales pace—a greater than expected decline—reflecting challenging demand conditions in the high interest rate environment.
- That said, upward revisions to prior data reveal that new home sales have been more resilient this year than previously thought. April’s originally reported 4.7% slip in sales was revised to a modest 2.0% increase.
- The average 30-year fixed mortgage rate peaked at 7.22% the first week of May, according to Freddie Mac. Although mortgage rates moved lower over the month, prevailing mortgage rates above 7.0% likely suppressed demand and diminished contract signings over the month.