February falls flat

March 25, 2024

New home sales, which are recorded at the contract signing, fell flat in February but sales remain almost six percent higher than a year ago. Rising mortgage rates subdued activity in February. The West remains the only region where sales were higher on both monthly and annual bases; it is also the only region where the median sales price of a newly built home is lower than the median sales price of an existing home, due to the significant shortage of resale inventory.

The inventory of newly built homes rose slightly in February and sits at an 8.4 months’ supply at the current sales pace. Builders have been offering incentives in the form of discounts and mortgage rate buydowns to lure sidelined buyers. The median sales price of a newly built home has fallen for four consecutive months, hitting $400,500 in February, the lowest since June 2021. The median square footage of new homes hit the lowest level since 2010 in the fourth quarter of 2023. Builders have been adapting to changing demand from millennial first-time buyers who are entering their prime home buying years.

Existing home sales, which are recorded at the contract closing and reflect activity from a few months ago, surged 9.6% in February to the highest pace of sales since February 2023. Sales were spurred by a rise in inventory, as 1.07 million homes were available for sale at the end of the month. The rise in inventories was not enough to offset the upward pressure on existing home values; the median sales price rose to $384,500, the highest since November 2023.

The surge in the resale market can be attributed to falling mortgage rates in December and January, hitting a low of 6.6% in January, according to Freddie Mac. Since then, mortgage rates have risen to nearly 6.9% in mid-March, which will hamper activity in the next few months. Falling mortgage rates also helped sellers unleash some much-needed inventory into the market, but supply is still well below what is needed to meet the stunningly strong demand from millennials. The surge in demand is both structural and cyclical, as millennials, the largest generation in the workforce, have more help from their parents who are hedged against inflation from refinancing to ultra-low rates or paying off their homes entirely. Those shifts, coupled with persistently low unemployment, have boosted first-time buyer demand.

According to Fannie Mae’s February sentiment survey, 65% of consumers believe now is a good time to sell a home while only 19% believe it is a good time to buy one. That has not stopped a surge in demand every time mortgage rates dip. Affordability remains low.