Are Higher Interest Rates Defeating New Home Sales?

House For SaleThe real estate market has been one of the strongest pillars in the economic recovery, but higher interest rates are starting to weigh on new single-family home sales. On Friday, the U.S. Census Bureau reported that purchases of new homes, measured by contracts signed, plunged 13.4 percent to a seasonally adjusted 394,000-unit pace in July compared to the downwardly revised June rate of 455,000 units. Home sales were up 6.8 percent from a year earlier, but as the chart below shows, the housing market is still well below its glory days.

Prior to the disappointing report, new home sales had increased for four consecutive months. On average, economists were expecting a pace of about 490,000 units. July’s reading was the biggest miss of expectations since May 2010.

The Commerce Department also reported the median sales price on new houses sold last month was $257,200, higher than $237,400 a year earlier, but down from the record high of $271,600 made in April. The average sales price came in at $322,700 for July.

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The seasonally adjusted estimate of new houses for sale at the end of July was 171,000 units. This represents a supply of 5.2 months at the current sales rate, up from near record lows in June. The all-time high for supply hit 12.1 months in January 2009. A supply of around 6 months is typically considered to be healthy. While the real estate market is due to slow its impressive price gains, higher interest rates are hitting consumers. According to the Mortgage Bankers Association’s latest report, for the week ended August 16, loan applications dropped 4.6 percent on a seasonally adjusted basis from one week earlier — the thirteenth decline in 15 weeks.

In fact, the refinance index has crashed 62.1 percent from its peak during the week of May 3, 2013. Earlier this week, Wells Fargo (NYSE:WFC) — the nation’s largest mortgage lender — said it was cutting 2,300 jobs in its mortgage-production unit. Between the beginning of May and the end of June, the average interest rate for a 30-year fixed-rate mortgage surged from 3.59 percent to 4.68 percent.

In morning trading, shares of Home Depot (NYSE:HD) and Lowe’s (NYSE:LOW) declined 0.50 percent and 1.3 percent, respectively. Home builders Lennar (NYSE:LEN), D.R. Horton (NYSE:DHI), and PulteGroup (NYSE:PHM) all fell more than 2 percent.

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