New home sales grew more slowly in January amid elevated mortgage rates

REAL ECONOMY BLOG | February 26, 2024

Authored by RSM US LLP

Sales of new homes grew by 1.5% in January, much slower than the 7.2% increase in December, most likely because of elevated mortgage rates. January’s sales were also lower than estimated while December’s increase was revised down from the 8% increase reported earlier by the Census Bureau.

Slower sales growth contributed to the fifth month in a row of median price declines on a year-ago basis. January showed prices of new homes fell by 2.6%. But the drop in January was the lowest in five months, with the previous four months posting double-digit drops on average.

The market for new homes has been a bright spot in the overall housing market despite still-elevated prices and multidecade high mortgage rates as the supply of existing homes remained low.

The supply of new homes stayed at 8.3 months at the current selling pace, a much more balanced state compared to the 2019 average, which was at 5.8 months.

Given a stronger economy than expected in the past couple of months, we might have to raise our forecasts for growth this year, which might imply a smaller number of rate cuts for the year.

That would most likely keep mortgage rates elevated if not marching higher, putting some more pressure on home sales. At the same time, though, prices will stabilize further, adding less burden on the inflation front as shelter prices remain the No. 1 headache for the Federal Reserve when it comes to core inflation.

To avoid a rebound in inflation, or equivalently a rebound in housing inflation, we do not see any rate hike until June for now. In other words, the Federal Reserve won’t rush loosening financial conditions when the goals are not reached.