New Home Sales Fell In February As Plunging Affordability Poses ‘Challenging Year’ For Housing Market

Topline

New home sales unexpectedly fell last month to the lowest level since November, continuing a recent slowdown in the red-hot housing market, but economists aren’t convinced the deceleration will help push home prices lower this year.

Key Facts

Sales of new single-family houses last month totaled 772,000 on a seasonally adjusted basis, down 2% from January and 6% from one year prior, according to a Wednesday report by the U.S. Census Bureau.

The median sales price of new homes was $400,600, compared to $423,300 in January, but average prices jumped from $496,600 to $511,000, surpassing $500,000 for the first time ever, the government said.

Despite the decline in new home sales, Bank of America economists said in a Monday note they believe new home sales will rebound to 800,000 this year given pent-up demand from recent supply issues and ongoing tightness, or low supply and high demand, in the market.

The main beneficiary of the pandemic-era tightness will be home prices, Bank of America said, forecasting the average home price will jump another 10% this year.

Not everyone’s so bearish: Ian Shepherdson, chief economist at Pantheon Macroeconomics, wrote in a Monday note that the housing market is in the early stages of a “substantial downshift” in activity that will help prices moderate, but not fall, as soon as this spring.

Shepherdson points out that although the average monthly mortgage payment has jumped by more than $400 per month, data from the Mortgage Bankers Association has shown an 8% decline in loan applications—foreshadowing a market slowdown that could dissuade many potential sellers from listing their homes.

Crucial Quote

“This year is likely to be a much more challenging year for the housing market given significant headwinds to affordability and ongoing supply-side challenges,” says Bank of America’s Alexander Lin. “The Russia-Ukraine conflict adds a new factor to the mix as higher oil and commodity prices will weigh on the consumer’s ability to spend elsewhere, increase uncertainty and recession concerns, and support higher input costs for builders.”

Key Background

Historically high savings rates and unprecedented government stimulus efforts helped ignite a home-buying frenzy during the pandemic. The median home sales price was $346,900 last year, up 17% to the highest level on record, according to the National Association of Realtors. In addition to an economy awash with cash, “chaotic” supply chains have also contributed to a dearth in housing supply and rising prices, according to Bank of America. “Builders have been bogged down,” says Lin, pointing out homes under construction last year exceeded the number of homes built for the first time in history, while the number of homes authorized but not started reached a record high.

What To Watch For

The Federal Reserve last week raised interest rates for the first time in more than three years, kicking off a series of rate hikes that will make a slew of debt offerings—including future mortgages—more expensive. “Volatile markets and the uncertainties of war put the brakes on rising mortgage rates,” says Bankrate Chief Financial Analyst Greg McBride, while cautioning that home-equity lines of credit almost always carry variable rates that would see an almost immediate increase, and fixed rates will likely start increasing for new mortgages. The average 30-year fixed rate mortgage went from 3.4% to 4.9% during the Fed’s last hiking cycle.

Further Reading

Existing Home Sales Fall As Affordability Concerns Rise (Forbes)

Experts Predict What The Housing Market Will Look Like In 2022 (Forbes)

Student Loans, Car Payments, Credit Cards: Here’s What May Cost More As Fed Raises Interest Rates (Forbes)