New home sales dropped in August as mortgage rates climbed

New home sales dropped in August from the month before, as mortgage rates topped 7% and rose to the highest levels in more than 20 years.

Sales of newly constructed homes fell 8.7% in August to a seasonally adjusted annual rate of 675,000 from a revised rate of 739,000 in July, according to a joint report from the US Department of Housing and Urban Development and the Census Bureau. Sales were up 5.8% from a year ago.

New construction has been attracting determined buyers frustrated by the historically low supply of existing homes. But, affordability concerns remain.

Homeowners with mortgage rates of 3% or 4% are reluctant to sell and buy another home at a much higher rate. In August, rates topped 7% and have lingered there as the Federal Reserve continues to address inflation.

New home prices are declining but remain historically high

The median price of a new construction home was $430,300 in August, down slightly from a median price of $436,600. The price was 2.3% lower than a year ago, the fifth month in a row of year-over-year price drops.

“Affordability remains a challenge as the tight housing market keeps prices elevated, and conditions are not likely to improve until interest rates or pricing comes down,” said Kelly Mangold of RCLCO Real Estate Consulting.

A sign outside a home for sale in Atlanta, Georgia, US, on Wednesday, Sept. 6, 2023. Home prices in the US climbed for a fifth month as buyers competed for deals in the least affordable market in decades. Photographer: Elijah Nouvelage/Bloomberg via Getty Images

US home prices rose in July to record-high levels

“Builders have been adjusting to the shifting market by lowering prices, and also by offering concessions, upgrades and relatively more attractive builder financing,” said Lisa Sturtevant, chief economist at Bright MLS.

She said that part of the price drop has also been builders shifting to smaller, less expensive homes.

“When they can, home builders are responding to the very strong demand for starter homes and homes for first-time buyers by building smaller homes on smaller lots,” she said. “However, it is often challenging for home builders to build starter homes and still turn a profit.”

One major obstacle, she said, is local zoning that often dictates lot sizes, setbacks, and design features that make it financially infeasible to build anything but the largest house the market will bear.

Available inventory of new construction homes continues to be attractive to home buyers frustrated by the lack of existing homes for sale.

The seasonally adjusted estimate of new houses for sale at the end of August was 436,000. This represents a supply of 7.8 months at the current sales rate.