Sales of new U.S. homes plunged more than expected in July to the lowest level in six years as rising mortgage rates and the relentless increase in home values slowed activity by edging prospective homebuyers out of the market.
New single-family home purchases tumbled 12.6% to a seasonally adjusted annual rate of 511,000 units, the Commerce Department reported on Tuesday. It marked the sixth consecutive month of declines. Economists surveyed by Refinitiv expected new home sales – which account for a small percentage of total sales – to fall 2.5% last month.
On an annual basis, new home sales are down 29.6%.
Despite the slowdown in purchases, the cost of a new home continued to march higher in July, with median prices jumping nearly 9% in July from the previous month to $439,400.
The collapse in home sales is the latest evidence of how the housing market has started to cool as the Federal Reserve hikes interest rates at the fastest pace in decades in order to bring scorching-hot inflation under control. Policymakers already approved two consecutive 75-basis point rate increases in June and July and confirmed that another super-sized hike is on the table in September.
Following the rate hikes, the average rate on a 30-year fixed mortgage – the most popular among new homeowners – climbed to nearly 6% in June, though they've since moderated. The average rate for a 30-year fixed rate mortgage hovered around 5.13% for the week ending Aug. 18, according to recent data from mortgage lender Freddie Mac.
That is significantly higher than just one year ago, when rates stood at 2.86%.
Combined with high home prices, the rapid rise in borrowing costs has pushed many entry-level homebuyers out of the market. A new report from Redfin last week showed that home sale cancellations soared in July to another two-year high as buyers retreated from the market. About 63,000 home purchase agreements were called off in July, equal to 16% of homes that went into contract that month.
"The deep correction for the U.S. housing market in 2022 continued into July with a sharp decline in sales activity and reduced construction of single-family homes," said Ben Ayers, Nationwide senior economist. "Mortgage rates have edged down in recent weeks and that could boost sales in the near-term, but affordability concerns are widespread in many local housing markets with many buyers now priced out of homes."
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