A home under construction.
Illustration by Lanette Behiry/Real Estate News

New home sales still hot, but will fall bring a chill? 

New construction got another boost in July, with sales up 31.5% year-over-year. Rising mortgage rates may reverse that trend.

August 23, 2023
2 minutes

Key points:

  • New home sales in July were up 4.4% compared to June, according to the Census Bureau.
  • Buyers have been turning to new construction as existing home inventory remains scarce, but sales are likely to cool with mortgage rates topping 7%.
  • New homes have been getting smaller even as median prices remain above $436,000.

Sales of new homes rose more than expected in July, but the recent surge in mortgage interest rates could temper sales in the coming months.

The U.S. Census reported new home sales were at a seasonally adjusted annual rate of 714,000 in July, up 4.4% compared to June and a whopping 31.5% increase from July 2022.

The share of new home sales has increased as existing-home inventory remains tight. But with mortgage rates now up to around 7.5% according to Mortgage News Daily, affordability may deter would-be buyers, said Lisa Sturtevant, chief economist at Bright MLS.

"There is no doubt that there is still a persistent, long-term housing shortfall in the U.S. However, in the near term, a lull in demand brought on by 7% mortgage rates could mean that builders will see less traffic and more empty model homes in the latter half of 2023," Sturtevant said.

Builders are already sensing this. On X (formerly known as Twitter), Ali Wolf, chief economist at Zonda, noted that some builders are saying mortgage payments are now much higher than many buyers can handle, and spiking rates will deter them from making a purchase for now.

The median home price of new homes sold in July was $436,700, down 8.7% compared to a year ago. But new home sizes have also been shrinking. The median square footage of a home under construction was 2,191 in the second quarter, the lowest since 2010, according to the latest Census data.

As new home sales have increased, supply continues to decrease, falling to 7.3 months of inventory compared to 10 months a year ago.

Heading into fall, mortgage rates will continue to be a driving factor in new home sales, said George Ratiu, chief economist at Keeping Current Matters.

"With borrowing costs rising, buyers' purchase budgets are shrinking, leading builders to recalibrate their pipeline," Ratiu said. "We have seen smaller homes come to market this year in response to shrinking affordability, and we can expect the trend to continue for the balance of the year."

Get the latest real estate news delivered to your inbox.