New home sales slid in August, held back as the tailwinds that had been pushing the market’s sails for the past few months are finally being overwhelmed by already elevated rates that keep creeping upward.
According to the latest numbers from the U.S. Census Bureau and the Department of Housing and Urban Development, new home sales backtracked 8.7% from July to August, the biggest monthly slide since September last year. Rising borrower costs are starting to tangibly dent demand, as higher interest rates may be shackling buyers to the sidelines; the Housing Market Index (HMI) jointly maintained by Wells Fargo and the National Association of Homebuilders (NAHB) reported drops in buyer traffic for the past two months, cutting off an upward trend that had begun last winter.
The lag in August sales also came even with home builders ramping up the incentives, like discounts and points buydowns, that have helped fuel strong new home sales throughout the spring and summer. Figures from the NAHB suggest that builders are attempting to combat the rising rate environment with a renewed focus on such incentives, which were seeing a downtick in use of late. Per the organizations September builder survey, 32% of homebuilders were cutting home prices in September, the largest share of builders doing so since December 2022. Moreover, 59% of builders provided sales incentives of all forms in September, the highest share since April.
Assertive discounting by builders is helping rein in new home prices, which came in at a median of $430,300 in August. That’s down 1.4% month over month and 2.3% year over year. The gap is also shrinking between the median sales prices of existing homes, which are seeing significant upward pressure due to a dearth of supply, and new homes, which are feeling the same pressures but are mitigated by builder incentives.
It’s worth noting that new home sales remain at a healthy level and are still up 5.8% year over year. Still, the impacts of the recent surge in rates on the new home market moving forward bears watching, bringing haziness to what had been a rosy outlook for much of the year. The new-home market’s near-term prospects are especially relevant given the increasing participation of younger buyers, many of whom are turning to new builds for their first forays into homeownership.
“Millennials continue to age into their prime home-buying years, and in a market with limited existing-home inventory, a new home at the right price is a good substitute,” said Odeta Kushi, deputy chief economist at First American Financial Corp. “Some good news in month’s report, 14% of new-home sales were priced below $300,000, an increase from 11% one year ago. Indeed, according to NAHB, 42% of new single-family home buyers were first-time buyers on a year-to-date basis in 2023. This is significantly higher than the 27% reading from a more normalized market in 2018. First-time home buyers are increasingly turning to the new-home market.”