The U.S. housing market has been anything but predictable since the onset of the pandemic. Supply chain delays, building material shortages and unprecedented demand have led to housing availability and affordability dilemmas. While a new home sales figure shines some light on the situation, rising interest rates make it likely that the positivity is short-lived.
New home sales in May increased 10.7% to an annual rate of 696,000, as reported by the U.S. Department of Housing and Urban Development and the U.S. Census Bureau. This comes after four consecutive months of declines in the metric. The 696,000 figure is the seasonally adjusted number of homes that would sell if this pace continued for the next 12 months.
This increase in new-build, single-family home sales is partly due to buyers rushing to purchase before imminent interest rate hikes. The Federal Reserve has begun a series of interest rate increases intended to combat rising nationwide inflation.
“At the Fed, we understand the hardship high inflation is causing. We are strongly committed to bringing inflation back down, and we are moving expeditiously to do so,” Federal Reserve Chair Jerome Powell told congressional lawmakers at a June meeting.
So far this year, the Federal Reserve has implemented three increases to the federal funds rate—a key benchmark that influences consumer borrowing rates, including mortgage rates. Homebuyers in May did not yet feel the effects of that month’s increase or the subsequent June increase.
This pair of increases took the federal funds effective rate from 0.33% in April to 1.21% in June. Mortgage rates, which stayed around 3.0% for all of 2021, immediately reacted. 30-year fixed mortgage rates have increased to 5.7% as of June 30, 2022.
According to a June 2022 report from the National Association of Home Builders (NAHB), inventory of new single-family home has remained elevated at 42.6% above last year, with 444,000 new homes available for sale. However, only 8.3% of those are completed and ready for occupancy.
As the effects of rising interest rates are realized, Jerry Konter, chairman of the NAHB, expects to see a decline in June’s new home sales. “High construction costs and rising mortgage rates are pricing many buyers out of the market. Only 10% of new homes were priced below $300,000 in May, compared to 23% a year ago,” Konter said.
Year-to-date new home sales are still down 10.6%. Additional federal funds rate increases are planned for the remainder of 2022, prolonging the uncertainty in the housing market.