As record summer heat scorched the U.S. last month, new-home sales found a short pier and took a long walk off it, according to government estimates published Tuesday.

Closed contracts on newly built homes plunged 10.5% on a monthly basis in July, recording an annualized pace of 607,000 units. That is more than 6% lower than a year ago, according to the data release from the U.S. Census Bureau and Department of Housing and Urban Development.

July marked the largest monthly pullback in new-home sales since January, when the pace had slowed more than 20%. The July performance is the second-slowest pace since late 2022, with affordability conditions continuing to hamper buyer demand.

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“The pullback came as mortgage rates climbed to their highest level in more than a year, making it harder for prospective buyers to make the monthly payment math work,” explained Sam Williamson, senior economist at First American Financial Corp., in an email to Scotsman Guide.

The median new-home sales price hit its lowest level in five years at $393,800 in July, underscoring how home builders continue to shift production and incentives in response to flagging demand. Despite those trends, average new-home sales prices were up more than 5% than a year ago.

“More notably,” added Williamson, “new homes remained cheaper than existing homes for a fifth straight month, despite usually selling for more.” That price gap reached its widest level since 1999 in July at $40,300, according to Williamson.

Harsh realities

New-home sales totaled just 50,000 in July, according to government estimates, the lowest monthly total since January, and 9,000 fewer than June.

Some market realities are simply out of builders’ hands to overcome, however.

“More than half of major markets underperformed their historical average, with mortgage rates keeping payment-sensitive buyers on the sidelines,” said Ali Wolf, chief economist at builder-focused data platform Zonda, sharing her reaction with Scotsman Guide. “Consumers still want to buy homes, but uncertainty is making them more cautious.”

Be that as it may, in some ways builders are actively getting ahead of the market, even as their pipelines get squeezed.

Maor Greenberg, co-founder and CEO of Spacial, a structural engineering platform, cautioned against reading too much into the 10.5% monthly decline in the new-home sales pace, noting that the Census Bureau had a 14% margin of error around that statistic.

“I’d keep an eye on the number of not-started homes for sale,” said Greenberg in emailed comments to Scotsman Guide. With 96,000 not-started homes for sale last July jumping to 115,000 last month, he said builders are selling more homes before they build them.

“Rates and monthly payments are still the bigger issue, but that’s outside our control,” added Greenberg.

Barriers to mortgage demand

Mortgage demand for newly built homes declined sharply in July, according to the Mortgage Bankers Association (MBA), which reported last week that new-home purchase applications dropped 5.7% last month compared to a year ago and slid 1% from June.

The MBA attributed the slide to higher borrowing costs as U.S.-Iran war tensions intensified following the collapse of a temporary ceasefire.

Typical mortgage rates for 30-year fixed-rate loans have exceeded year-ago levels for three straight weeks, according to MBA data, as 10-year U.S. Treasury bond yields — which hovered around 4.4% at the end of June — have remained above 4.6% since late July.

“Policymakers need to remove regulatory barriers, reduce economic uncertainty and support a stronger business climate so builders can produce the homes and apartments the nation urgently needs,” said Robert Dietz, chief economist of the National Association of Home Builders (NAHB), in an analysis of purchase affordability published last week.

The NAHB assesses that the share of typical household income required to purchase a new home increased from 32% in the first quarter to 34% in the second quarter, fueled by the rise in borrowing costs and a 2% gain in the median price of newly built homes. For low-income households, that income share rose from 65% to 67% over the quarter.

Even with roughly two-thirds of home builders reporting heavy reliance on incentives to close deals, and the price of new homes lagging their existing-home counterparts, sales of newly built houses remained more than 4% lower year to date through the end of July.

“A nationwide housing shortage of roughly 1.2 million units continues to strain affordability,“ added Dietz.