US new home sales surge to 19-month high amid falling prices and rising mortgage rates

In September, sales of new single-family homes in the United States reached a 19-month high, driven by falling median house prices.

According to Reuters, the annual median house price experienced its most significant drop since 2009, largely due to incentives offered by builders to attract buyers. However, rising mortgage rates, which are approaching 8 per cent, could potentially curtail the demand, despite a chronic shortage of previously owned houses that is driving buyers towards new construction. The bulk of homes sold in September fell within the price range of $150,000 to $499,999, as reported by the US Commerce Department.

Bill Adams, Chief Economist at Comerica Bank, told Reuters that builders are using interest rate buy down incentives and reducing floor plan sizes to enhance affordability for prospective buyers. This approach has created distinct dynamics in various segments of the housing market.

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The surge in new home sales in September marked a 12.3 per cent increase to a seasonally adjusted annual rate of 759,000 units, the highest level since February 2022. August's sales figures were revised up to 676,000 units, a slight improvement from the previously reported 675,000 units. The unexpected sales growth defied economists' forecasts, which had predicted a rate of 680,000 units.

New home sales represent a leading indicator for the housing market as they are counted at the signing of a contract. These figures revealed a 33.9 per cent year-on-year acceleration in September.

The new construction market is benefiting from the shortage of existing homes, with builders striving to maintain the momentum. Notably, the National Association of Home Builders reported a 10-month high in builders reducing home prices in October, with an average price discount of 6 per cent. These tactics are making homeownership more achievable and stimulating activity in the market.

While the median new house price experienced a notable 12.3 per cent drop from the previous year, the largest percentage decline since February 2009, this has not deterred buyers. The majority of transactions occurred in the $150,000 to $499,999 price range. There was also an increase in sales within the $500,000 to $749,000 price bracket.

However, the rise in mortgage rates poses a potential threat to future sales. With the 30-year fixed-rate mortgage reaching 7.9 per cent, the highest level since September 2000, the Mortgage Bankers Association reported a drop in mortgage applications to levels last seen in 1995. Mortgage rates have risen alongside the 10-year U.S. Treasury yield, which is hovering just below 5 per cent, a result of concerns that the Federal Reserve may keep interest rates higher for a more extended period due to the robust economy. Since March 2022, the central bank has raised its benchmark overnight interest rate by 525 basis points, reaching a range of 5.25 per cent to 5.50 per cent.

As of the end of September, there were 435,000 new homes on the market, up from 432,000 in August. It would take 6.9 months, as opposed to 7.7 months in August, to sell all the houses on the market at the sales pace in September.

Economists anticipate that the housing market may have stabilised in the third quarter, thanks to strong homebuilding and new home sales, with residential investment likely rebounding after nine consecutive quarters of contraction.

(With inputs from Reuters)

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