New home sales, which are recorded at the contract signing, rose 14% to an annual rate of 800,000 in September, beating expectations and marking the highest sales rate in six months. August data was revised sharply lower.
Builders continue to work through backlogs as supply chain bottlenecks and labor shortages persist. Homes sold in September skewed to the upper range of prices, with 55% selling for over $400,000; that figure was only 34% in 2020. First-time and lower-income buyers are being priced out of many popular housing markets as investors snap up single-family homes to rent and wealthy buyers trade up or buy second homes.
Existing home sales, which are recorded at the contract closing, rose 7% in September to an annual rate of 6.3 million units. Mortgage rates fell below 3% in the summer, which contributed to strong sales last month. With inventory remaining tight, at 2.4 months’ supply, home prices continue to stretch towards historic highs. According to the S&P CoreLogic Case-Shiller home price index, annual home price growth hit 19.8% in August, the same pace as in July. The silver lining for buyers is that the momentum in price increases appears to be slowing.
Mortgage rates are now at the highest level in six months, 3.09%, which contributed to a drop in mortgage applications in early October. Those who are looking to purchase a home are facing bidding wars and competing against all-cash offers. The share of first-time buyers has fallen to the lowest rate since 2015 while all-cash sales made up almost a quarter of sales in September.
The Federal Reserve is expected to begin tapering its purchases of Treasuries and mortgage-backed securities as early as November, with interest rate hikes now expected in 2022 instead of 2023. We expect to see mortgage rates rise when it happens; the Mortgage Bankers Association is already forecasting rates will hit 4% next year. Mortgage applications collapsed in 2018 on much smaller increases in rates.
Builders will remain busy through the end of the year as the lack of supply in the existing home market continues to push many investors and higher income buyers into the new home market. With the median sales price for new homes above $400,000 for the second month in a row, first-time buyers are being priced out. As high material prices and labor shortages continue to drive up the cost of housing, any rise in mortgage rates will be felt by those looking to purchase a new home.
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