New Home Sales Hit 2 Year Low but Is It a Bad Thing?

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Data released in September 2018 indicates that new home sales have declined to a two-year low. According to, rising mortgage rates and higher home prices are affecting the housing market. The data for the last three months also has been revised down. There have been declines in home building, permits and housing completions in September which led to the lower numbers.

home salesWhile some worry that an under-performing housing market could be a sign of bad things to come, there are indications that this worry could be overstated. According to many financial analysts, the fundamentals for the economy and the housing market are still quite robust. For example, new filings for jobless benefits dropped in September. This means that the labor market is very strong. Other data also indicates that there is a strong labor market even though there is a growing trade war between China and the US.

A major reason that the housing market is under-performing a strong US economy has a lot to do with mortgage interest rates. The rate for a 30-year fixed mortgage is nearing 5%. This is leading to some people being priced out of the housing market. Others are putting things on hold to see if rates will start to drop in the next year or two.

While the housing market has softened a bit, there are other good signs that we are not on the edge of a recession. The economy grew at a strong 4.1% pace in the second quarter of 2018. The Federal Reserve has raised rates three times this year and will do so again before the end of the year. This kind of strong growth in the economy has not been seen in more than 10 years. It is highly unlikely that a major softening of the economy is coming, regardless of what is going on in the housing market at this time.

Another reason for the drop-in home sales is there simply is not enough affordable stock for first time buyers in many areas of the country. New homes in the more affordable range of $200,000 and under for many areas are simply not as profitable for builders. They tend to focus on building new homes in the $300,000 and up range. People buying for the first time may not be able to afford the houses that are available, so are holding on and continuing to rent. Perhaps when they earn a higher income, they will be able to afford to buy a home.

Still, experts contend that if you can afford to buy and are waiting, you may want to press ahead and do the deal. Here are three reasons why:

Interest Rates Are Rising

After many years of 3% interest rates, the Fed has been making major increases as the economy has been on better footing. In October 2018, mortgage rates briefly crossed the 5% range. They currently stand at 4.8% or so. With economic growth continuing to occur, it is expected we will see at least one more interest rate increase in 2018. Rates for mortgages will probably hit 5% and stay there in 2019. It is not likely that rates are going to fall well into the 4s any time soon. And you can forget seeing rates under 4% for a long while.

Prices Are Going Up

Housing prices have gone up substantially since 2015. It is expected that house prices will increase by 3.2% year over year this year – new homes. For existing homes, prices should go up by 2.5%. These price increases are not as bad as in the years of the real estate boom but waiting will probably mean you will pay more. The economy and labor market is strong and this will maintain a steady pressure on home prices.

Inventory Levels are Rising

A serious inventory shortage has been troubling the housing sector since 2015. Some people have been forced to buy smaller houses than they wanted. But by the end of the  year, more inventory growth in new homes will start to hit some of the most popular markets, such as Nashville TN. New home construction is expected to grow, but this will still be limited because of the strong labor market.

Overall, the slower housing market is not all a bad thing, but you would be a wise consumer to buy soon if you have been thinking about it. A combination of higher prices and interest rates will make your home purchases pricier in 2019 and beyond.

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About Bryan Dornan

Bryan Dornan is Chief Editor of Bryan has worked in the mortgage industry for over 20 years and has a wealth of experience in providing mortgage clients with the highest level of service in the industry. Bryan's continual focus is to promote affordable home-ownership to consumers like you across the United States. Should you have any questions about articles like this, let him know.