Washington, D.C. – New single-family home sales in the United States surged in April unexpectedly, fueled by falling home prices as builders reacted to weak demand and higher borrowing costs. But even as the short-term increase will lift the spirits of builders and housing industry stockholders, industry experts caution the housing market is still on unsteady ground with mortgage rates close to multi-decade highs and consumer confidence weak.
New home sales rose 4.2% in April to a seasonally adjusted annual rate of 689,000 units, from a revised 661,000 units in March, data released by the U.S. Department of Commerce on Friday showed. This was the second straight monthly gain and exceeded economists’ forecasts of 675,000 units.
Although the numbers were a bright spot, the dynamics of the market underneath them paint a more nuanced picture. The increase was primarily motivated by builders’ price reductions as they attempt to shed inventory in a cooled market brought on by greater financing expenses.
The median price of a new home sold in April fell to $417,400, down 3.2% from March and nearly 8% lower than the same month last year. Builders across the country have increasingly offered incentives such as price reductions, free upgrades, and assistance with closing costs to lure buyers back into the market.
“Builders are attempting to thread the needle,” said Alicia Bernard, a senior economist for housing at the National Association of Home Builders (NAHB). “They’re dealing with increased construction and labor costs but recognize they can’t pass those on to consumers who are experiencing 7% mortgage rates.”
The median 30-year fixed mortgage rate still hovers at 7.1%, vastly more than the 3%–4% level prior to 2022. The Federal Reserve’s rapid rate hikes to bring inflation under control have driven borrowing expenses to levels not experienced since the early 2000s, pricing out many prospective buyers, especially first-timers.
“Affordability is the primary concern now,” Bernard said. “Even with the decrease in prices, monthly payments are unaffordable for many households.”
April’s gains in home sales were not spread equally across the nation. The South, the biggest market for new homes, experienced a healthy 7.3% rise in sales. The Midwest had a 4.4% increase. The Northeast and West declined by 3.3% and 2.1%, respectively.
Experts say the uneven growth is due to regional differences in jobs, building activity, and population trends. In states such as Florida and Texas, where job creation and population flow are strong, housing demand has fared relatively better. High-cost coastal areas, however, continue to deal with their affordability problems.
States where the zoning regulations are more relaxed and housing is relatively affordable continue to have decent activity,” said Mark Flynn, a senior real estate analyst at Zillow. “But in states like California or New York, buyers are objecting to both the price and the interest rate.”
Despite the strong sales numbers, the overall picture for the housing market is unclear. Steadily higher interest rates are likely to continue well into 2025, and the Fed has little appetite for lowering rates in the near term unless inflation starts to decelerate more convincingly.
The latest guidance from the central bank is “higher for longer,” supporting the idea that mortgage rates will remain higher over the year. Further downward pressure on borrowing costs is likely to suppress any sustained housing upturn.
We’re still facing a challenging environment,” Freddie Mac senior strategist Melissa Grant said. “The increase in demand we had during the pandemic has dissipated, and we’re facing now a structural affordability crisis.
In addition, inventories of new homes are still high. Based on the current rate of sales, 7.5 months of supply for new homes would be left on the market compared to 6.4 months last year. This is lower than the pandemic levels of almost 10 months but still signifies a slower rate of turnover in the market.
Home buyers are becoming more cautious about making a move in an unstable market. They are waiting and watching, hoping for a decline in mortgage rates or additional price reduction before they buy.
“People are holding back,” said Janet Morales, a Phoenix, Arizona, real estate agent. “Even pre-approved buyers are hesitating to make an offer. There’s just too much uncertainty regarding where the rates and prices are going.
Homebuilders, however, are drawing back from new construction, reluctant to overbuild in a market that can’t necessarily handle more inventory. Single-family housing starts fell 1.8% in April, and permits, which are a lead indicator, dropped 2.5%, the Census Bureau reported.
The building cooling activity can ultimately result in a more tight supply in the future, which can help sustain prices but continue to limit affordability if rates are elevated.
While purchasing remains unaffordable for most, the rental sector has taken up much of the slack. Rents have continued to increase modestly in top cities, although the rate has slowed since last year’s peak. The movement towards renting reflects the deeper difficulty in attaining homeownership in today’s economic environment.
“Renting is the only viable option for many people right now,” said Thomas Wei, a housing policy researcher at the Urban Institute. “Until wages rise meaningfully or interest rates fall, we’re likely to see this dynamic persist.”
Experts are calling for long-term policy fixes to solve both the demand and supply aspects of the housing equation. This involves raising federal and state incentives for affordable development, relaxing zoning rules, and considering mortgage subsidy programs for first-time homebuyers.
“There’s no silver bullet,” said Wei. “But without coordinated action, we risk a generation of Americans being locked out of homeownership.”
The April increase in new home sales is some respite for a housing market that is besieged by higher interest rates and chronic affordability issues. But the surge is largely driven by price discounts and incentives, rather than an across-the-board resurgence in demand.
With mortgage rates likely to be high and economic uncertainty on the horizon, analysts advise against reading the latest statistics as the beginning of a sustainable upturn. The housing market might have been steadied for the moment, but the journey from here is still fraught with danger.
