UNAFFORDABLE UTAH

New home sales dropped in August as mortgage rates climbed

Sep 27, 2023, 3:23 PM | Updated: 5:51 pm

WASHINGTON, DC (CNN) — 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.

“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.

Fear in Utah

“The builders are scared,” said Steve Caldwell, executive officer of the Utah Valley Home Builders Association. “They can’t build a big inventory because they don’t know if they can sell it.”

Caldwell said builders are feeling the pain of high mortgage rates as potential buyers struggle to afford the higher payments.

“In some instances, I think the same house the monthly payment is almost double and that’s made it impossible for them to afford but even more impossible for them to qualify,” he said.

Caldwell said there is still high demand for new homes and that buyers currently sitting on the sidelines will return when mortgage rates drop. He added that Utah’s housing market is better off than most states.

“I think we will weather the storm better than most states,” Caldwell said. “But it’s still not a fun situation for us or their buyers or for the banks or anybody in the market. It’s a tough situation.”

Meanwhile, the Utah Association of Realtors said it expects slightly lower interest rates in 2024. However, there’s worry that a reduction in permits for new homes could increase Utah’s housing shortage and lead to higher home prices.

The-CNN-Wire™ & © 2023 Cable News Network, Inc., a Warner Bros. Discovery Company. All rights reserved.

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New home sales dropped in August as mortgage rates climbed