New home sales bounce back in March

Summary

New home sales jumped 8.8% to a 693K-unit pace in March, the strongest pace since September 2023. Although the report was accompanied by downward revisions to sales in February, on balance, the pace has strengthened on trend so far to start the year. New home sales should continue to gradually improve with a sturdy macroeconomic backdrop and structural affordability and availability constraints in the resale market remaining as tailwinds. That noted, higher interest rates and rising existing supply could weigh on the new home market moving forward.

New home sales rebound

• New home sales rebounded 8.8% to a 693K-unit pace during March. Even with February sales revised considerably lower, the pace of sales has averaged 667K so far this year, which represents a 4.5% improvement from the pace averaged in the same quarter last year and a 3.5% rise from Q4-2023's pace.
• The upturn in new home sales over the past year despite higher interest rates largely reflects builders' ability to offset eroding housing affordability conditions through price discounts, mortgage rate buy-downs and other incentives. A scarcity of available existing homes for sale and emergence of the "build-to-rent" market have been other factors supporting demand.
• These factors have allowed the new home market to digest the higher interest rate environment relatively well. A recent spike in Treasury yields on the back of new inflation and monetary policy uncertainty will test the mettle of both buyers and builders in the months ahead, however.
• During the week ending April 18th, the average 30-year mortgage rate stood at 7.1% according to Freddie Mac, up from 6.9% the previous week. The up-tick represents the latest step-back for housing affordability, and discouraged buyers may move back to the sidelines as a result. Larger home builders may increase the use of pricing incentives to attract buyers, but not every builder has the ability to lean on lower prices or rate-buy downs to boost sales. Higher financing costs also stand to raise the cost of construction for builders, which could also limit the use of incentives.
• Rising inventory levels in the existing market are another potential headwind. Existing supply remains tight, yet more resale options for buyers could cut into demand for new homes.

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