New Home Sales Climb in July Despite Steep Mortgage Rates

Despite the steep mortgage rates, the US new home sales rebounded strongly in the month of July. It shows the underlying strength of the US economy even though there is still uncertainty surrounding the global economy due to COVID-19. This article will examine why new home sales have rebounded in July despite the steep mortgage rates, what factors have contributed to this trend, and the outlook for the future.

Strong Demand for New Homes Amidst Low Inventory

The demand for new homes has remained strong in recent months despite the pandemic. The low inventory levels for existing homes have led many homebuyers to consider new homes as a viable option. According to the US Census Bureau, new home sales rose 13.9% in July compared to the previous month, reaching a seasonally adjusted annual rate of 901,000. This is the highest level seen in nearly 14 years. The sales of new homes are also 36.3% higher than the same period last year.

This rebound in new home sales can be attributed to various factors, including the record low mortgage rates, low inventory levels of existing homes, and the shift towards remote work. The COVID-19 pandemic has caused many people to rethink their living situations, and the flexibility of remote work has enabled them to move further away from the cities to areas with lower population densities and lower housing prices.

Record Low Mortgage Rates

The mortgage rates have been at historically low levels, which has provided a strong incentive for homebuyers to purchase a home. The Federal Reserve has reduced its benchmark interest rate to near zero, which has led to lower mortgage rates. According to Freddie Mac, the average rate for a 30-year fixed-rate mortgage fell to a new record low of 2.88% in August. This is significantly lower than the average rate of 3.56% seen in the same period last year.

Low mortgage rates have made homebuying more affordable, and this has led to a surge in demand for new homes. The National Association of Home Builders (NAHB) reported that builder confidence has increased to the highest level in the index’s 35-year history in August. The low mortgage rates have also made refinancing more accessible, which has led to homeowners freeing up cash to purchase new homes.

Shift Towards Remote Work

The COVID-19 pandemic has caused many people to adopt remote work, which has enabled them to move further away from the cities and purchase homes in areas with lower housing prices. This shift towards remote work has led to an increased demand for new homes in suburban and rural areas. According to Redfin, homebuyers are increasingly searching for homes in the suburbs and rural areas, with a 60% increase in searches for homes in small towns in July, compared to last year. This trend is expected to continue, and it will likely contribute to the long-term growth of the housing market.

Challenges in the Housing Market

Despite the strong demand for new homes, the US housing market has faced several challenges in recent months. The low inventory levels for existing homes have led to a shortage of affordable homes, and this has pushed many homebuyers towards new homes. The supply chain disruptions caused by the pandemic have also led to delays in construction, which has further reduced inventory levels.

The rising cost of building materials has also increased the cost of new homes, which has made them less affordable for some homebuyers. The tariffs on Canadian lumber have led to a 80% increase in the price of lumber, which has increased the construction costs of new homes. The labor shortages caused by the pandemic have also pushed up the cost of labor, which has contributed to the rising costs of new homes.

The Outlook for the Future

The outlook for the US housing market is positive, despite the challenges it faces. The strong demand for new homes is expected to continue in the foreseeable future, due to the low inventory levels of existing homes and the shift towards remote work.

The low mortgage rates are also expected to remain low, as the Federal Reserve has signaled its intention to keep interest rates near zero until 2022. This will continue to make homebuying more affordable, and it will likely lead to strong demand for new homes. However, the rising costs of building materials and labor shortages may limit the growth of the housing market.

Conclusion

The US new home sales rebounded strongly in July, despite the steep mortgage rates. The surge in new home sales can be attributed to various factors, including the low inventory levels of existing homes, record low mortgage rates, and the shift towards remote work. Homebuyers are increasingly searching for homes in suburban and rural areas, and this trend is expected to continue. The future of the US housing market looks positive, although the rising cost of building materials and labor shortages may present challenges.