The price of newly built homes plunged last month as homebuilders sought ways to attract buyers who are feeling the pinch of higher mortgage rates.
The median sales price of a newly constructed home dropped 7.6% year over year, to $400,500 in February, according to a report on Monday from the U.S. Census Bureau and the U.S. Department of Housing. This was the lowest median price since June 2021.
The number of sales of new homes also dipped slightly in February to a seasonally adjusted annual rate of 662,000. This was down 0.3% from January, but up 5.9% from the same month last year.
“New construction continued to be a popular option for buyers amid low existing-home inventory,” says Realtor.com senior economic research analyst Hannah Jones. “However, as mortgage rates climbed back toward 7% in February, some buyers decided to put a hold on their homebuying plans.”
The sales dip might be partly due to mortgage rates ticking up in February. The higher rates are likely to have discouraged prospective homebuyers. The average rate on a 30-year fixed mortgage was 6.94% in the last week of February compared with 6.63% in the last week of January, according to Freddie Mac.
Still, new-home sales remain up on an annual basis and now claim a larger chunk of the market than they did before COVID-19, notes Jones.
“A slight uptick in mortgage rates held back the pace of new-home sales in February,” says National Association of Home Builders Chief Economist Robert Dietz. “Our latest builder surveys show that roughly one-quarter of builders reported cutting home prices in March.”
Dietz attributes February’s price decline to a combination of the builder price cuts along with a trend toward building slightly smaller homes to address affordability concerns.
Homebuilders have responded to higher rates with offers to pay down points on a buyer’s mortgage, or even offer builder financing at below market rates, according to Bright MLS Chief Economist Lisa Sturtevant. The multiple listing service covers the mid-Atlantic region.
‘To some extent, homebuilders can also switch up the product they deliver. We’ve seen more builders bring smaller, less expensive homes to the market in recent months,” says Sturtevant.
Which parts of the country saw the largest increases in new-home sales?
The Northeast experienced the biggest spike in the number of newly constructed homes for sale and sold. The region notched a 60.9% year-over-year increase in February, according to the seasonally adjusted numbers in the government report. However, sales were down 31.5% from January to February.
The West also notched large annual increases in the number of new-construction sales, rising 43.4% in February. Sales were up 2.3% from January.
The Midwest experienced a 15.3% year-over-year increase in sales, although the number of new homes for sale and sold dipped 2.4% from January.
The South, where building has been strong, was the only region to see a decline in February. New-construction sales fell 10% on an annual basis, but rose 3.7% from the previous month.
High mortgage rates have hurt the sales of existing homes, helping builders
Higher mortgage rates have generally been a boon to homebuilders, as they’ve put a crimp on sales inventory of existing homes. Homeowners who are locked into a low rate might be reluctant to sell, limiting the number of existing homes on the market.
“New construction continues to be an outsized share of the housing inventory. With existing homeowners locked into low mortgage rates, homebuilders have benefited, with more prospective homebuyers looking at new homes,” says Sturtevant.
Homebuilders are racing to meet the rising demand, with new home starts jumping 10.7% in February from the prior month, for an annual pace of 1.52 million, according to the government’s monthly new residential construction report.
About a third of all homes available for sale today are new construction, says Jones. That’s “a significant shift from pre-pandemic norms as builders offer home supply in an undersupplied market,” says Jones.
Building permits, a sign of future construction, rose 1.9% in February, also reaching an annual pace of 1.52 million—the highest level seen since August, according to that report.
Meanwhile, existing-home sales surged 9.5% in February from the prior month, the largest monthly increase in a year, the National Association of Realtors® reported last week.
“Buyer and sellers are gearing up for the spring season, and the best time to sell is approaching,” says Jones. “But the spring’s frenzy will likely be dependent on how mortgage rates move in the coming months.”
