New-home sales activity rises in August, but pessimism remains

Mortgage applications to purchase a newly constructed home increased month-to-month in August, as did both single-family starts and completions.

But pessimism still abounds among homebuilders, especially as measured by authorizations for new single-family construction.

On an unadjusted basis, the Mortgage Bankers Association’s Builder Application Survey reported a 17% increase in loan applications for new homes in August compared with July. But this was down from 10.1% from one year ago.

August’s increase ended a streak of four consecutive months of decline and came “despite higher mortgage rates, declining homebuilder sentiment, and looming economic uncertainty,” said Joel Kan, the MBA’s associate vice president of economic and industry forecasting in a press release. “Ongoing volatility in mortgage rates in the months ahead may lead to larger than typical swings in the pace of new home sales.”

Separately, single-family housing starts in August totaled a seasonally adjusted 935,000, 3.4% above the revised July figure of 904,000, the U.S. Census Bureau and Department of Housing and Urban Development reported.

Single-family housing completions in August, totalling 1,017,000 on a seasonally adjusted basis, were 0.4% over the revised July rate of 1,013,000.

The increased construction activity comes in spite of homebuilder sentiment declining for the ninth consecutive month in September.

That might be reflected in lower permitting activity, a decline of 3.5% in August from July, to a seasonally adjusted 889,000 from a revised 932,000.

“The August housing market solidified the rebalancing that is taking place, with home values and home value appreciation continuing to cool off as demand takes a step back,” said Nicole Bachaud, Zillow economist in a statement. “Home builders are in a pivotal moment as they navigate this rapidly changing environment, and they are continuing to adjust their expectations about what the future housing market will hold.”

Bachaud attributed the rise in starts on a month-to-month basis to the large drop in mortgage rates during August.

Permitting was down on an annual basis for the first time since the start of the pandemic, and that means tight inventory will be a fact of life for a while going forward.

“While demand is slowing for the time being, largely due to affordability obstacles, demographic factors will contribute to sustained demand for housing for years to come, and with the current trend of building activity slowing, low inventory will continue to push long term price growth up and affordability down,” Bachaud said.

The slowdown in construction activity is a concern because of the “structural” lack of inventory of homes for sale, said First American Deputy Chief Economist Odeta Kushi in a statement.

“Millennials aging into their prime home-buying years and a lack of existing-home inventory, as rate-locked in homeowners see little incentive to list their homes for sale, mean that new-home construction is essential in meeting future shelter demand,” Kushi said.

While new home sales data will be released on Oct. 26, the MBA used its survey to provide a preview.

“MBA’s estimate of new home sales jumped 18% in August, bringing the sales pace to 699,000 units, which is the strongest pace since May 2022,” Kan said. “The current sales pace is still 23% lower than the November 2021 peak and is down 20% from last year.”

Its seasonally adjusted estimate for August is an increase of 18.3% from the July pace of 591,000 units. On an unadjusted basis, the MBA estimates that there were 58,000 new home sales in August, an increase of 16% from 50,000 new home sales in July.

The average loan size fell for the fourth consecutive month, to $415,594 in August from $416,029 in July.

By product type, 72.1% of August’s new home buyers applied for a conventional mortgage. Federal Housing Administration-insured loans had a 17% share, while Veterans Affairs-guaranteed mortgages comprised 10.7% and the U.S. Department of Agriculture Rural Housing Service program just 0.2%.