New home sales tumble as inventories spike to 16-year highs
New home sales tumbled to seven-month lows in June, underscoring the devastating effect of near-record home prices and high mortgage rates.
According to the Department of Commerce, new home deals fell 0.6% to a seasonally adjusted annual rate of 617,000, the lowest since November. That came after a nearly 15% drop in May, the largest in two years.
Economists in a Reuters poll expected new home sales to jump to a 640,000 sales pace in June.
On a regional level, sales fell 7.7% in the Northeast and dropped 6.9% in the more affordable Midwest. Sales rose by 1.4% in the West and edged up 0.3% in the South.
New home sales, which account for roughly 13% of the residential housing market, are tumbling even as builders continue to ramp up supply. The supply of new homes rose to 476,000 in June, the highest since 2008.
The number of completed homes that went up for sale increased to 102,000, the highest since 2009.
Although sales dropped and inventories rose, new home prices averaged $417,300 in June, virtually unchanged from a year ago. Economists say that won’t be enough to bring sidelined buyers back into the market.
Affordability woes “torpedo” housing demand
Homebuilders have increased production in hopes of rising demand, but so far, the market hasn’t responded as they hoped.
“The rise in home prices and rebound in mortgage rates [have] combined to torpedo affordability, and homebuying demand has deteriorated,” said Stephen Stanley, chief U.S. economist at Santander Capital Markets.”
"The result is that new home inventories have backed up noticeably.”
Mortgage rates have declined recently, largely on expectations that the Federal Reserve will begin lowering interest rates in September. Despite the decline, average 30-year rates on conforming loans stood at 6.87% for the week ending July 12.
The latest mortgage data from Freddie Mac shows that 30-year rates averaged 6.77% in the week ending July 18. That’s lower than the 52-week average of 7.02% but well above levels that would encourage buyers back into the market.
According to Realtor.com, for home sales to rebound, mortgage rates need to fall to around 5%.
That’s the “sweet spot” that would boost the purchasing power of first-time buyers and encourage existing homeowners to sell their property.
Based on the latest estimates, 5% mortgages could be at least two or three years away. Realtor.com expects rates to fall to the low 6% range this year, whereas the National Association of Realtors expects a drop to 6.3%.
In the meantime, it’s not entirely clear how much longer home builders can operate in an environment of high rates and low demand.
“Home builders are also dealing with higher rates for construction and development loans, chronic labor shortages, and a dearth of buildable lots,” said Carl Harris, the chairman of the National Association of Home Builders.