U.S. new-home sales plunge as mortgage rates rise

Story originally appeared on the Detroit News.

Washington — Americans cut back sharply in July on their purchases of new homes, a sign that higher mortgage rates may weigh on the housing recovery.

The Commerce Department said Friday that U.S. sales of newly built home dropped 13.4 percent to a seasonally adjusted annual rate of 394,000. That’s the lowest pace in nine months. And it is down from a rate of 455,000 in June, which was revised sharply lower from a previously reported 497,000.

New-home sales have risen 7 percent in the 12 months ending in July. The annual pace remains well-below the 700,000 that is consistent with a healthy market.

The housing market has been one of the strongest performers this year in an otherwise sluggish economy, helped by steady job gains and low mortgage rates. But mortgage rates have risen a full percentage point since May and have started to steal some of the market’s momentum.

“The spike in mortgage rates is slowing the pace of improvement,” Dan Greenhaus, chief global strategist for BTIG, an institutional brokerage, said in an email. “Given the speed at which housing was improving, and the growing talk of a renewed bubble, some moderation, assuming it doesn’t materially worsen, is not a terrible outcome.”

In July, builders began work on the fewest single-family homes in eight months. And mortgage applications from potential buyers have fallen since rates have risen more than a full percentage point.

The impact of higher mortgage rates has surfaced in the new-home market faster because the July sales report reflects signed contracts. Sales of previously occupied homes reached a nearly four-year high last month. But that report measured completed sales, which typically reflects mortgage rates locked in a month or two earlier.

The jump in previously occupied home sales likely reflected a rush by home buyers to lock in lower rates. Some economists expect those sales to fall back in August.

Even so, most economists expect the housing recovery will persist. Mortgage rates remain relatively low by historical standards. The average rate on a 30-year mortgage this week was 4.58 percent, according to Freddie Mac.

Slower sales pushed up the supply of new homes for sale to 171,000 at the end of July, the most in more than two years. Tight supplies of new and previously owned homes have led to sharp price increases. An increase in the supply could moderate those price gains.

Though new homes represent only a fraction of the housing market, they have an outsize impact on the economy. Each home built creates an average of three jobs for a year and generates about $90,000 in tax revenue, according to data from the homebuilders association.