New Home Sales Rise as Buyers Respond to Lower Rates

New home sales surged 4.1% in September from August, reaching a seasonally adjusted annual rate of 738,000, which is 6.3% higher than last year. This spike followed a recent Federal Reserve interest rate cut, which lowered mortgage rates to 6.18%, encouraging buyers to sign contracts despite ongoing affordability challenges. Builders expressed optimism, with NAHB chairman Carl Harris noting an anticipated moderate easing of mortgage rates and a strong demand for housing due to the supply shortage.

Inventory increased to 470,000 units, an 8% rise from last year, with the highest level of completed homes since 2009. Builders have been incentivizing sales by offering mortgage rate buydowns and other perks, particularly for the completed homes ready for occupancy. Prices for new homes remained steady at a median of $426,300, and the share of homes priced below $300,000 rose to 17%. As inventory remains high, builders will likely provide incentives to attract more buyers.

Why Mortgage Rates Rose After Fed Rate Cut

Mortgage rates have climbed for the fourth consecutive week, hitting 6.54% for a 30-year fixed mortgage, following a slight dip after a Fed rate cut. Despite hopes of a housing market boost, the higher borrowing costs and a tight home supply have cooled activity, with existing home sales and mortgage applications both dropping. The current rate rise stems from strong economic indicators, such as robust job growth and retail spending, which have raised bond yields and investor demand for higher returns on government debt, limiting mortgage rate declines.

Many prospective buyers are waiting for lower rates or more favorable market conditions to make homeownership more affordable. Economic and political uncertainties, such as the upcoming presidential election and rising national debt, add to the volatility of the mortgage market. Buyers like Kimberly Bradley in North Carolina and Ken Lowrey in South Carolina share concerns about locking in high rates and being financially stretched, making them cautious about entering the market until conditions improve.

Mortgage Applications Fall in Latest MBA Survey

Mortgage applications saw a slight drop of 0.1% for the week ending October 25, 2024, according to the Mortgage Bankers Association (MBA). The Refinance Index declined by 6% from the previous week but was still 84% higher than the same period last year. Purchase applications, however, rose by 5% on a seasonally adjusted basis and were 10% higher than a year ago. MBA’s Deputy Chief Economist Joel Kan attributed the recent rate hikes, driven by bond market volatility, to a decline in overall application activity since September when rates were lower.

The average rate for a 30-year fixed mortgage rose to 6.73%, marking its highest level since July 2024, while the refinance share of applications decreased to 43.1%. The FHA and VA shares of total applications both saw declines. Interest rates also rose across loan types, with 15-year fixed mortgages averaging 6.27% and 5/1 ARMs averaging 6.20%. Although recent activity is down, Kan noted that demand from younger buyers could support future growth as inventory increases gradually.