Low mortgage rates supercharge new home sales

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Low mortgage rates continue to juice the housing market, with sales of new single-family homes climbing 7.9 percent in January to a seasonally adjusted annual rate of 764,000, according to the U.S. Commerce Department.

The latest figure is 18.6 percent higher than January 2019 and it’s the highest since July 2007. Mortgage rates have been in decline since the coronavirus outbreak was first reported at the end of December.

“The ongoing low interest rates have encouraged buyers to purchase homes,” says Jing Fu, director of forecasting and analysis at the National Association of Home Builders (NAHB). “Low mortgage rates, along with steady job growth and rising wages, are fueling housing demand.”

About half of January’s sales gains came from people buying homes that have yet to be constructed, further suggesting that low rates are inducing buyers. And it’s not only low rates driving the strong seasonal demand – the warmer than average weather in much of the country is luring purchasers earlier than usual.

The spike in home sales comes as inventory remains low and occurs just before the traditional spring buying season. Inventory is now at 5.1 months’ supply, with 324,000 homes for sale.

“Additional housing production is needed to keep new home sales strong in the coming year,” says Fu.

Low housing inventory remains a problem for homebuyers

However, the lack of inventory may even slow the housing market somewhat, despite low mortgage rates.

“We expect new home sales to increase about 716,000 in 2020, so we do expect some slowing in the pace as inventories become tight,” says Fu. “The increase in new home sales needs additional new home production, especially the homes at the entry-level.”

The confidence of homebuilders remains high, as homebuyers are emerging even if their home is not yet built, leading to a surge in new construction.

In January, 324,000 new single-family homes were available for sale, 6.6 percent lower than in January 2019. However, only 76,000 of those homes were actually completed, says NAHB.

This difference between what’s available and actual home completions suggests builders are anticipating buyers to take advantage of today’s falling mortgage rates.

The low mortgage rates may also be showing up in climbing house prices. The median sales price of a new home in January rose to $348,200, according to NAHB. A year earlier that figure was $305,400, an increase of 14 percent.

As mortgage rates decline, a monthly housing payment may become more affordable even if the total purchase price of the house increases. So buyers may be willing to pay a higher price as long as they can secure an affordable mortgage.

Bankrate polls experts each week on the direction of mortgage rates.

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Written by
James Royal
Senior investing and wealth management reporter
Bankrate senior reporter James F. Royal, Ph.D., covers investing and wealth management. His work has been cited by CNBC, the Washington Post, The New York Times and more.
Edited by
Senior mortgage editor
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