US mortgage rates soar, homebuying demand weak: New home sales in September fell by 0.6% month-on-month, home prices down 3.9% year-on-year

The U.S. new home market continues to face pressure under the strain of surging mortgage rates, with builders’ price cuts and promotions failing to effectively boost demand.

Data released by the U.S. government on Tuesday show that sales of newly-built single-family homes fell by 0.6% month-on-month in September, with an annualized rate of 676,000 units, above the median forecast of 651,000 units from Bloomberg-surveyed economists.

Meanwhile, the median price of new homes dropped 3.9% year-on-year to $400,400, marking a decline in seven of the nine months so far this year compared to the same period last year.

Mortgage rates rose by about half a percentage point last month and reached their highest level in nearly three years at the beginning of October, only edging down slightly afterwards. The rapid increase in financing costs is eroding the willingness of potential buyers to purchase and has dragged builders’ confidence index down to its lowest point in 14 years.

Nationwide economist Daniel Vielhaber pointed out that builders are having to make greater efforts to attract buyers and that elevated mortgage rates are likely to continue weighing on the sales environment at least until the end of the year.

"Price cuts and offering mortgage rate subsidies help keep sales going, but the market relies more on builder concessions rather than strong endogenous demand for support," Vielhaber stated in a research report.

Amid persistently weak demand, builders are still making slow progress in reducing inventory.

In September, new home inventory for sale fell 2.3% year-on-year to 476,000 units, equivalent to 8.4 months of supply at the current sales pace—the lowest level this year, but still much higher than pre-pandemic historical norms.

Bloomberg Industry Research analyst Drew Reading pointed out in a research report last week that entry-level buyers are particularly sensitive to rising financing costs, making builders focusing on this segment—such as D.R. Horton Inc. and Meritage Homes Corp.—face greater risk exposure.

Builders are working hard to maintain customer purchase willingness by offering smaller unit homes and subsidizing mortgage rates as ways to ease affordability issues.

It is noteworthy that new home sales data are based on contract signings, and are seen as a timelier leading indicator than existing home sales, which are calculated upon closing. However, monthly volatility in this data is significant—according to the government report, the 90% confidence interval for changes in September new home sales ranges from a decrease of 14.4% to an increase of 13.2%, so results should be interpreted cautiously.

Regionally, in the U.S. South—the largest new home sales market—annualized sales fell 6.6% in September to 413,000 units. Sales in the Midwest also declined, partially offsetting gains in the West and Northeast.