The market is getting tougher for new home builders as mortgage rates continue to rise and first time home buyers lose tax breaks. The rise in mortgage rates closely coincides with a drop in the total number of new home sales. This correlation proves the fact that homebuyers want more than they can afford and mortgage rates are holding them back.
This shouldn’t come as a surprise though. There’s a severe lack of entry-level homes on the market, which is the segment that most sorely needs inventory. If builders continue focusing on high-end and luxury homes, then they’ll find it hard to stay profitable as there are less and less home buyers able to afford mid to high-end homes.
- Mortgage rates increased by a quarter of a percent in January from 4% to 4.25%.
- Over the past year, the median home price has increased by 2.5% ($323,000).
- Senior economist for Zillow, Aaron Terrazas, says that the market can expect incremental growth at best.
Sales fell in December, when the new tax law was signed, and then again in January, when mortgage rates moved higher. Sales are now at their lowest level since August of last year.
The government’s measure of new home sales is based on signed contracts during the month, reflecting the people who are out shopping and signing deals with builders. It is therefore a strong read on current reactions to home affordability. Mortgage rates moved a full quarter of a percentage point higher during January, from below 4 percent to about 4.25 percent. It then took off further from there.
“It seems that the jump in mortgage rates in January had an immediate impact on contract signings,” wrote Peter Boockvar, chief investment officer at Bleakley Advisory Group. “You can’t get more interest rate sensitive when it comes to homes and cars with the associated cost to finance.”
Higher home prices are adding to the difficulty for buyers. The median price of a newly built home rose to $323,000, a 2.5 percent gain compared with January 2017. Builders are not only increasing prices, but they are also mostly focused on the move-up market, not the entry level where homes are needed most.
View the original article at CNBC