Homebuyers backed away from new homes in October, spooked by higher mortgage rates

Higher mortgage rates sidelined demand for newly built homes in October.

Sales of new homes decreased 5.6% to a seasonally adjusted rate of 679,000 units last month from September’s seasonally adjusted annual rate of 719,000, according to the Census Bureau on Monday. That was much lower than Bloomberg consensus expectations of 725,000 units for October but still 17.7% higher than a year ago.

The slide in sales activity likely underscores the late summer spike in mortgage rates, according to one expert, which spooked budget-conscious buyers.

Read more: Mortgage rates at 20-year high: Is 2023 a good time to buy a house?

“I expect that we’ll see a decline in October. When we look at this data, it reflects the contracts entered into in August and September when rates were still climbing,” RSM US real estate senior analyst Crystal Sunbury told Yahoo Finance ahead of the release. Sunbury noted that closing on a new home takes about 30 to 60 days.

“By December we should see some recovery in new home sales, given the retreat in mortgage rates,” Sunbury said.

Mortgage rates crested 7% in mid-August and stayed about that threshold throughout September before surging even higher in October, hitting 7.79% the last week of that month, according to Freddie Mac. Rates have retreated for four straight weeks since then, dropping by a half-point so far in November.

Similarly, higher borrowing costs provided a monthly blow to existing home sales in October, which dropped 4.1% month over month and down 14.6% from the prior year, according to the National Association of Realtors (NAR).

A lack of inventory on the resale side has also weighed on sales. Many current homeowners are hanging on to their current homes because they remain reluctant to trade up and lose their existing low mortgage rate.

The number of previously owned homes for sale at the end of October was 1.15 million units, per NAR data, the lowest inventory level for that month since 1999.

That had been a boon to new home sales this year even as mortgage rates march higher. Builders have filled in some of the inventory gaps. At the end of October, the number of new houses for sale was 439,000, or a 7.8-month supply at the current sales pace.

To take the edge off rates, many public homebuilders have been offering below-market-rate home loans. For example, in Santa Fe, N.M., PulteGroup (PHM) is developing new communities, offering a 30-year fixed rate of 5.75%.

Read more: Types of mortgage loans: Buying a house in 2023

But smaller builders have been far less sanguine about market conditions. These builders are not as well-capitalized for future projects and don’t have the financial bandwidth to offer the same kind of mortgage rate buydowns as the bigger guys.

New contemporary attached residential homes are shown for sale by Beazer Homes USA Inc. in Vista, California, U.S., October 24, 2023.     REUTERS/Mike BlakeNew contemporary attached residential homes are shown for sale by Beazer Homes USA Inc. in Vista, California, U.S., October 24, 2023.     REUTERS/Mike Blake

New contemporary attached residential homes are shown for sale by Beazer Homes USA Inc. in Vista, Calif., on Oct. 24. (Reuters/Mike Blake) (Mike Blake / reuters)

In October, 36% of smaller builders reported cutting home prices, up from 32% in the two previous months. Data from the National Association of Home Builders found this is the highest share of builders cutting prices during this cycle.

For instance, the median sales price of new homes sold in October was $409,300, the government reported, down from $422,300 the month before. The average sales price was $487,000, lower than September’s revised figure of $515,400.

That has hurt overall builder sentiment.

The October BTIG/HomeSphere survey, which polls 75 to 125 small and mid-sized builders nationally, found sales and traffic trends worsened despite “easy year-over-year” comparisons, BTIG homebuilding analyst Carl Reichardt Jr. wrote in a note.

“The bottom line: our survey suggests that new home demand trends remain quite sluggish for private builders,” Reichardt wrote.

Dani Romero is a reporter for Yahoo Finance. Follow her on Twitter @daniromerotv.

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