New home sales fell in February as the housing market felt the effects of higher mortgage rates, which have remained at multiyear highs for months.
New home sales fell 0.3% from January to 662,000, according to a Monday report from the Census Bureau. Nevertheless, the number of new home sales is nearly 6% higher than it was in February of last year, in part because the inventory of pre-owned homes is so low that buyers have been forced into the market for new stock.
The median sales price for a new home was $400,500 in February. The median price has now fallen for three consecutive months and, notably, is the lowest it has been since June 2021, when mortgage rates were ultra-low, typically below 3%.
Prices for new home sales have generally fallen since peaking at nearly $497,000 in October 2022. Yet new home prices are just under 30% higher than their trough at the start of the pandemic.
“Mortgage rates rose in February, and the elevated rates took a bite out of new home sales,” Holden Lewis, a housing expert at NerdWallet, said. “Builders are competing with home resales by constructing new homes for buyers on a limited budget. Half of new homes sold in February cost under $400,000. A year earlier, just 42% were in that price range.”
During the pandemic, the Federal Reserve shaved its interest rate target to near-zero, and mortgage rates plunged to super-low levels. At one point in early 2021, people were locking in incredible 2.5% mortgages — the lowest level in post-war modern history.
That spurred a flurry of homebuying and investment, turbocharging demand and generating a notable boost in construction for the housing market. But then, the dynamic dramatically shifted when the Fed pivoted and quickly began tightening, driving mortgage rates to the highest level since the turn of the century, with rates peaking at above 8%.
As of Monday, the average rate on a 30-year, fixed-rate mortgage was just over 6.9%, according to Mortgage News Daily, which tracks daily changes in rates.
One of the side effects of that mortgage rate whiplash was that many homeowners who locked in those sub-3% pandemic-era mortgages have been holding off on selling, which has cut down the inventory of existing homes and created more demand for new homes — a phenomenon that, painfully for consumers, caused home prices to keep rising alongside mortgage rates.
Now, as of February, existing home sales are at a seasonally adjusted annual rate of 4.38 million, down 3.3% from last year and down about 35% from their pandemic-era peak. In October, existing home sales dropped to the lowest level in more than a decade.
The housing situation hasn’t gotten much easier in 2024, either.
In December, there was a wellspring of hope among investors and homebuyers that, with inflation coming down, the Fed would begin cutting rates soon. In fact, the general consensus was that the Fed’s first rate cut would come this month, causing mortgage rates to tumble.
But now, inflation has been proving stickier than previously thought, and the Fed once again held its interest rate target steady during its March meeting last week. Expectations of when the Fed will pivot have now been pushed back to June or perhaps even to when the Fed meets at the end of July.
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In a bit of good news for the overall housing market, the number of housing starts ticked up in February. Housing starts, the change in the number of new residential buildings that began construction, rose 10.7% from January to this past month, according to a report out last week.
Starts are now at a seasonally adjusted annual rate of 1.52 million. From February 2023, they increased by 5.9%.