New home sales dropped 10.9% to 603,000 in September from August, continuing the downtrend since a recent high in late 2020, according to data from the Census Bureau. Since the start of the year, U.S. sales have dropped more than 28% in total as housing demand has slumped.
The steep rise in mortgage rates has been the number one reason for the fall in demand. As the Federal Reserve increases interest rates to combat inflation, mortgage rates have spiked to a multi-decade high of more than 7%, according to recent data from the Mortgage Bankers Association.
There is reason to believe the Fed will continue to raise rates as inflation remains persistent, especially the core components. We expect another 75-basis-point hike in November and a potential 50-basis-point hike in December. That should likely push mortgage rates even higher and further dampen housing sales.
Despite the sharp fall in demand last month, home prices did not seem to cool. September’s median new home price was $470,600, 13.9% higher than a year ago. That figure was only 7.8% in August compared to a year prior. This added to the overall inflation concern about how sticky housing prices have been.
With a 12- to 16-month lag between the movements of housing prices and the shelter components in the government inflation reports, we should not expect housing inflation to come down to the pre-pandemic level before the first half of 2023.
As sales fell, the inventory of homes for sale at the end of the month rose to 462,000, the highest level since 2008. At the current sales pace, it would be equivalent to 9.2 months of supply compared to 8.1 months in the prior month. Sales fell the most in the South, which accounted for more than 50% of total sales.