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Prices for newly constructed homes dropped last month, as builders offered bigger incentives to lure buyers struggling with affordability challenges.
The median sales price of new houses sold in August was $420,600, the U.S. Census Bureau reported on Wednesday. That represented a 4.6% decline from one year ago, and a 2.1% drop from July’s median price.
In contrast, the median sales price of previously owned homes rose 3.1% in August from a year ago, to $416,700, the National Association of Realtors® said last week. The number of sales of existing homes dropped last month, as many buyers sat on the sidelines waiting for mortgage rates to fall further.
Sales of new single-family houses also dropped 4.7% in August from the prior month, to a seasonally adjusted annual rate of 716,000. However, the August sales figure was up 9.8% from a year ago, when mortgage rates were significantly higher.
Rates on 30-year fixed mortgages averaged 6.5% in August, down from more than 7% a year earlier, according to Freddie Mac. Rates have since fallen further in anticipation of the Federal Reserve’s easing cycle, which the central bank kicked off last week with a half-point reduction to its benchmark rate.
“As mortgage rates come down, home builders could expect more buyer traffic this fall. However, there are a couple of countervailing factors,” says Bright MLS Chief Economist Lisa Sturtevant. “First, buyers who are back in the market will find they have more options. The inventory of existing homes has been increasing as more owners are listing their home for sale, and lower rates will encourage more homeowners to list. As a result of more existing homes on the market, there could be less demand for new homes.”
As well, Sturtevant says that while lower mortgage rates historically tend to accelerate price growth, affordability is currently a major constraint on the market. “So, while there may be more buyers in the market, home builders might find that consumers’ purchasing power has not increased,” she says.
Amid record-high home prices, homebuilders have increasingly turned to buyer incentives such as mortgage rate buy-downs, price reductions, and credits for closing costs to appeal to buyers with affordability concerns. Builders have also shifted their focus to smaller houses that are more attainable for first-time buyers.
Last week, major homebuilder Lennar reported that its average home sales price dropped 6% last quarter from a year ago, to $422,000. The price drop was primarily due to an increase in buyer incentives and a shift to smaller floor plans, the builder said.
Developing story, more to follow.