After a slump in June, the sales pace of new homes picked up month over month in July, according to data published on Wednesday by the U.S. Census Bureau and the Department of Housing and Urban Development (HUD). 

In July, the sales pace of new homes climbed 4.4% compared to June, reaching a seasonally adjusted annual rate of 714,000. On a year-over-year basis, new home sales were up 31.5%.

This aligns with mortgage application data for new builds, which showed demand up 35.5% year-over-year in July and up  0.2% from June.

Building activity continues to be buoyed by a strong and steady demand, but there could be a shift underway in the housing market, warns Bright MLS Chief Economist Lisa Sturtevant. 

Two factors are at play here: high mortgage rates, which, currently around 7.5% are likely to price out many prospective homebuyers this fall, and inventory, which is beginning to tick up in many markets. 

However, the rate of supply for new homes still surpasses that of existing homes. 

“Although there is just 3.3 months of supply of existing homes, that level has been increasing for the past few months. For new homes, there is 7.3 months of supply,” detailed Sturtevant.

The seasonally‐adjusted estimate of new houses for sale at the end of July was 437,000. At the current sales pace this inventory represents 7.3 months of supply, which is a decline from the 7.4 months of supply recorded in June and 2.8 months below July 2022.

Regional breakdown

In the Midwest and West regions, transactions saw double-digit monthly gains. The pace of sales jumped 31.5% above the same month in 2022. In fact, all regions of the country posted double-digit improvements from a year ago. Southern metros saw a majority of newly built homes this year, as many people migrated towards the region, noted George Ratiu, chief economist at Keeping Current Matters. At the same time, the Northeast region also experienced a noticeable pickup in activity. Mid-sized markets that offer proximity to major employment centers and relative affordability saw strong demand.

Homebuilders are making new homes more affordable

As the sales pace picked up month over month, the median sales price of new homes also ticked up in July, climbing $21,300 to $436,700. It was up 4.8% from June, but down 8.7% from last July. Still, it was the largest monthly increase since September 2022. The average sales price was $513,000.  

New home prices have been declining year-over-year for the past four months, smoothing the affordability crisis, noted Sturtevant.

In fact, in July 2023, 40% of new houses were sold for less than $400,000. A year earlier, 33% cost less than $400,000, remarked Holden Lewis, home expert at NerdWallet.

“Some home builders have edged prices down slightly, but builders also are increasingly offering concessions, builder financing, or upgrades to help entice buyers,” Sturtevant added. 

While prices are marginally declining, economists also noticed that smaller homes were coming to market this year in response to shrinking affordability. According to Ratiu, that trend should continue for the balance of the year.

Can this strong builders’ activity last ? 

In August, the homebuilder confidence index declined for the first time in 2023, signaling headwinds looming in the sector. 

“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,” said Sturtevant.

Doug Duncan, chief economist at Fannie Mae, said the new home sales report was in line with expectations. But mortgage rates are the X factor.

“Given that mortgage rates have again risen above 7 percent, we believe the risk to new home sales is to the downside. Of course, this may be partially offset as a rise in completed inventories may lead builders to offer more generous concessions to bolster demand.”