Despite Higher Mortgage Rates, New Home Sales Post Solid Gain in March

Despite higher interest rates last month, new home sales rose in March due to limited inventory of existing homes. However, the pace of new home sales will be under pressure in April as mortgage rates moved above 7% this month, which is expected to moderate sales and increase the use of builder sales incentives this Spring.

Sales of newly built, single-family homes in March rose 8.8% to a 693,000 seasonally adjusted annual rate from a downwardly revised reading in February, according to newly released data from the U.S. Department of Housing and Urban Development and the U.S. Census Bureau. The pace of new home sales in March is up 8.3% from a year earlier. Although consumer demand has been somewhat dampened due to higher interest rates, builders continue to supply new homes to the market to lift inventory to make up for the low resale supply.

Shelter inflation remains the largest, lingering obstacle for the challenge of lowering inflation. More housing supply will ultimately tame shelter inflation growth and lower interest rates, which in turn will improve the cost of financing for land developers and home builders, thus enabling more attainable housing supply.

A new home sale occurs when a sales contract is signed, or a deposit is accepted. The home can be in any stage of construction: not yet started, under construction or completed. In addition to adjusting for seasonal effects, the March reading of 693,000 units is the number of homes that would sell if this pace continued for the next 12 months.

New single-family home inventory in March remained elevated at a level of 477,000, up 2.6% from February. This represents an 8.3 months’ supply at the current building pace, which has supported by the ongoing shortage of resale homes. Data from the National Association of Realtors indicate just a 3.1 months’ supply of existing single-family homes in March, with a balanced market holding 5 to 6 months’ supply. Inventory of newly-built single-family homes is up 10.2% on a year-over-year basis.

The median new home sale price in March was $430,700, up nearly 6% from February, and down 1.9% compared to a year ago.

Regionally, on a year-to-date basis, new home sales are up 15.1% in the Northeast, 17.8% in the Midwest and 28.1% in the West. New home sales are down 6.6% in the South.