What new home sales numbers could mean for buyers and the economy

Home sales last month beat expectations and reached a high not seen in more than a year, as more supply enters the housing market and potentially puts a downward pressure on prices.

New single-family home sales increased 4.1 percent from March to April and were up by 11.8 percent from a year ago, according to data released by the Census Bureau on Tuesday. Sales were at a seasonally adjusted annual rate of 683,000 units, up from a revised 656,000 in March. 

Builder confidence also climbed for the fifth straight month, reaching its highest level since 2022, according to National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index released earlier in May. 

All of this could be good news for people in the market for a new home, as the data provides evidence that more homes are on the way, addressing the country’s shortage.

The addition of new homes, according to groups like the Home Builders, could also put downward pressure on inflation.

“April’s new house sales were mixed news for homebuilders, but good news for the inflation outlook,” Bill Adams, chief economist for Comerica Bank, said in a statement.  

Adams also said builders are offering incentives to new buyers to get them into new homes.

This is partly necessary because millions of people have been reluctant to sell their old homes and move into new homes due to their historically low interest rates, which fell further during the pandemic.

Even growing families interested in moving from smaller homes into larger ones can be disincentivized from doing so if they have low mortgage rates on their old homes.

Mortgage rates have jumped since the pandemic as the Federal Reserve has raised interest rates to try to lower inflation.

At their peak, mortgage rates moved above 7 percent in November, but they have since settled above 6 percent as the Fed has introduced smaller interest rate increases.

But rates are still high compared to historic pandemic-era lows; the 30-year fixed rate mortgage rose modestly last week to 6.39 percent. 

“With financing more expensive, construction activity slowing, and materials costs coming down, homebuilders are moving to lower price points to keep sales going,” Adams said.

Mixed message

Analysts say the data are a mixed message for home builders, who have seen the costs of financing the building of new homes rise because of the Fed’s interest rate hikes.

Data released earlier this month by the National Association of Realtors (NAR) showed that existing home sales declined by 3.4 percent from March to a seasonally adjusted annual rate of 4.28 million units. About a third of homes listed for sale in March were in different stages of the construction process. 

Those figures point to the reluctance of many people to leave their homes, in part because of their mortgage rates. That increases the importance of bringing new homes on the market.

“New home construction is taking on an increased role in the marketplace because many home owners with loans well below current mortgage rates are electing to stay put, and this is keeping the supply of existing homes at a very low level,” NAHB Chairman Alicia Huey said in a statement. 

To Adams’s point, the NAHB/Wells Fargo survey showed that 54 percent of builders are offering incentives, and close to a third are reducing prices. 

Price declines

The median price for a new home dropped to $420,800 in April, down from a revised $455,800 in March. This is the lowest median sales price since 2021. 

Adams said this price decline, alongside price drops in the nation’s existing inventory, could bode well for inflation, given that shelter costs make up around 40 percent of core inflation. 

“Shelter accounts for 35 percent of the CPI basket and over 40 percent of the core basket, which excludes volatile food and energy prices,” Adams said. “April’s drop in house prices will flow through to the CPI and PCE price indexes in 2024, and likely contribute to a big slowdown in core inflation next year.” 

Shelter costs rose by 0.4 percent in April, according to consumer price index (CPI) data released earlier this month — making it the largest contributor to the 0.4 percent monthly increase in overall inflation. 

The cost for shelter has increased by 8.1 percent in the past 12 months on an unadjusted basis. 

An inflation slowdown could lead the Federal Reserve to pump the brakes after a string of interest rate hikes. Some economists predict the central bank will pause rate hikes after the CPI figures indicated inflation is cooling. 

Robert Dietz, chief economist for the NAHB, warned in an email to The Hill that the central bank’s rate increases meant to slow inflation could end up stifling supply in the housing market, which would put upward pressure on inflation.

“Higher interest rates increase the cost of financing builder and developer loans (for building homes and developing land), which reduces housing supply in a market starved of inventory.  This places upward pressure on shelter inflation,” he concluded.