New home sales fell 4.5% in January after being upwardly revised in December. Sales remain above the pre-pandemic peak but have been slowing since mid-2021. Lack of supply, coupled with strong demand, has pushed up prices to record highs over the past year. Home buyers and investors have flocked to the new-build market despite builders continuing to face delays to production due to the lack of workers, land and materials.
The drop in sales was broad-based except for the West. Disruptions from severe winter weather created delays across much of the country in January. Ongoing supply chain issues are still the main concern for builders who are struggling with delays to everything from windows to garage doors. The constraints on building explain why the significant demand in the existing home market cannot be quickly.
Buyers are facing higher prices as 56% of new homes sold were above the $400,000 price range. In 2020 that figure was only 34%. It takes over a year for higher home prices to show up in inflation data; prices started to skyrocket at the start of 2021. We expect to see more housing-related inflation driving up overall inflation into the end of 2022.
Mortgage demand started falling this year because rising mortgage rates are squeezing out buyers. In February, mortgage rates hit the highest level since June 2019, erasing all of the pandemic-driven savings. Applications to purchase a home dropped over 10% while refinancing fell almost 16% in mid-February. The average conventional loan size remains around its record high at $482,000. This translates into an implied monthly payment of more than $2300, or an additional $400 per month higher than it was pre-pandemic.
Separately, existing home sales, which are recorded at the contract closing and reflect activity from November and December, surged 6.7% in January as buyers jumped at the chance to secure lower rates. Strong sales translated to a 15.4% increase in prices from a year ago. The lack of inventory is to blame; only 860,000 homes were available for sale at the end of January. It will take 1.6 months at the current sales pace to deplete inventories, another record low of supply. All-cash offers continued to soar. They made up 27% of all sales in the month, up from 19% a year ago.
Housing demand remained strong at the start of the year but with rising mortgage rates and record-high home prices. It will begin to soften as more buyers are sidelined. The Federal Reserve is expected to raise rates in March and begin reducing its balance sheet, which has already pushed mortgage rates to pre-pandemic levels. Builders have backlogs to keep them busy this year. Hurdles to buying suggest the pipeline for sales could dry up more abruptly than previously expected.
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