US new home sales unexpectedly surge in August

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Sales of new U.S. homes unexpectedly surged in August as buyers into the market before rapidly rising mortgage rates climbed even higher.

New single-family home purchases rose nearly 29% to a seasonally adjusted annual rate of 685,000 units, the Commerce Department reported on Tuesday. Economists surveyed by Refinitiv expected new home sales — which account for a small percentage of total sales — to fall 2.2% last month.

On an annual basis, new home sales are down just 0.1%.

The median new house price climbed 8% from the year-ago period to $436,800 — the slowest increase since November 2020. There were about 461,000 new homes on the market at the end of August, the report shows, an increase from 459,000 units in July. The average sales price was $521,800.

Contractors work on a home under construction in Antioch, Calif., on Tuesday, June 14, 2022. (Photographer: David Paul Morris/Bloomberg via Getty Images / Getty Images)

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The surprise upside in new home sales may represent buyers trying to lock in a lower mortgage rate as the average 30-year fixed rate average dipped closer to 5% from earlier highs.

"New home sales were way above expectations in August as homebuilders cut prices and mortgage rates pulled back a bit from June and July levels," said Bill Adams, chief economist for Comerica Bank. "With mortgage rates up making new highs again after the September Fed decision, August’s upside surprise in home sales is unlikely to be repeated."

The average rate for a 30-year fixed mortgage surged to 6.29% for the week ending Sept. 22 after the most recent Fed rate hike, according to recent data from mortgage lender Freddie Mac.

That is significantly higher than just one year ago when rates stood at 2.88%.

For Sale sign is posted in front of a property in Monterey Park, Calif., Aug. 16, 2022. (Photo by FREDERIC J. BROWN/AFP via Getty Images / Getty Images)

US HOME PRICE GROWTH COOLED IN JULY AT FASTEST PACE SINCE 1980S

The interest rate sensitive housing market has started to cool noticeably in recent months as the Federal Reserve moves to tighten policy at the fastest pace in three decades in order to cool consumer demand and bring scorching-hot inflation under control. Policymakers already lifted the benchmark federal funds rate five consecutive times — including three back-to-back 75-basis-point increases — and have shown no signs of slowing down.

Economic projections released after the Fed's September rate hike show policymakers expect interest rates to hit 4.4% by the end of the year, suggesting that another three-quarter percentage point increase is on the table.

Officials expect to continue raising rates in 2023, before stopping at a termination rate of 4.6% — well into restrictive territory — and eventually modestly lowering rates beginning in 2024.

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The federal funds rate is now at a range of 3.0% to 3.25% — up from 0% earlier this year — raising the risk of a recession next year. Some experts already believe the housing market is in a recession and have warned that prices could soon tumble 20%.