Tight Housing Inventory Inhibits Sales

New home sales, which are recorded at the contract signing, fell 2% in February from January’s downwardly revised figures. Lower sales in the West and the South, the largest housing market in the country, drove the losses. Sales fell 6.2% from a year ago, the ninth consecutive month of lower sales, as builders attempted to catch up on projects. The pipeline of new home buyers is drying up as mortgage rates continue their upward march, impacting many first-time buyers’ ability to switch from renting to buying.

The availability of homes available for sale is skewed to the higher end as builders are more incentivized with higher margins due to rising input costs. The price of lumber alone has added $30,000 to the average price of a new home. Over a third of new homes sold in 2020 were under $300,000; now that figure has fallen by more than half.

Separately, existing home sales, which reflect contracts signed one or two months ago, fell 7.2% from January levels, the largest drop in a year. Home sales have been falling for seven months straight, mostly due to the lack of homes available for sale. Many would-be home buyers are now facing rising mortgage rates and being priced out of a market they could afford last year. Prices remain at record levels as investors have been crowding out first-time buyers.

Mortgage rates will continue to rise as the Federal Reserve has signaled more rate increases are on the way. The Fed is now chasing inflation, which it hasn't done in decades. Rising housing costs are yet to be fully reflected in the inflation data.

Bottom Line
Rising mortgage rates will continue to reduce affordability for many would-be home buyers in an already record home price environment. A lack of inventory of homes has been pushing more buyers to the new-build market, which is plagued with its own constraints due to the lack of construction workers, land and materials. Prices for important inputs, such as lumber, remain stubbornly high. Supply chain bottlenecks are not expected to fully ease this year.

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