January 18, 2024

New home sales surge points to promising horizon

The real estate market is in the midst of a significant surge in new home sales, signaling a promising horizon for both buyers and sellers alike.

New home sales reached a 19-month high in September. This unexpected boom can be attributed to a combination of factors, including builder discounts, a chronic shortage of existing homes, and rising mortgage rates.

Amid low inventory and rising interest rates, the demand for - and price of - existing homes continued to rise steadily in 2023. Meanwhile, the median price of a new home fell to $418.800 in November, down 12.3% year-over-year.

Some builders have been offering discounts to increase affordability. Their challenge is to maintain market momentum without threatening profits. And with mortgage rates still nearly double what they were during the pandemic, many builders are also using interest rate buydown incentives.

While post-pandemic rate hikes by the Federal Reserve central bank have driven the cost of a home loan higher, the rest of the economy continues to surge. Job numbers have been largely unaffected.

With more job confidence, individuals and families are still looking to secure their dream homes. Surveys show potential buyers also enjoy the increasingly immersive and personalized experience of new home shopping.

Many analysts say demand is not sustainable if mortgage rates continue to rise, which could lead to a softening of new home sales in the coming year. Despite challenges, the U.S. housing market appears to be stabilizing.

Recent data point to improving rates, which help construction conditions. Rates began retreating in the back half of 2023 as inflation cooled and the Fed halted rate increases. In December 2023, the Fed chose to keep its baseline interest rates steady at a target rate of 5.25% to 5.5%, the third straight time it held the line after 11 consecutive hikes in 2022 and 2023.

The central bank now expects to cut rates in 2024 — a reversal that would touch all corners of the economy, including on the 10-year Treasury, the main driver of fixed mortgage rates. Investors are betting on from three to six interest rate cuts by the end of the year. While the Fed doesn’t directly set mortgage interest rates, they tend to follow the path of the baseline rate over time.