In the first quarter of 2018, sales of newly built homes dropped, and many mortgage experts say there is a clear culprit: mortgage interest rates. Signs are that buyers are unable to afford to buy the home they want. Higher rates, combined with losing some tax breaks after the Trump tax bill was made law, have caused home sales to fall somewhat.
Home sales were shown to fall in December and then again in January. Sales as of now are at the lowest since August 2017. The government measures new home sales based upon counting contracts signed during the month. This reflects the people who were house shopping and signing deals with home builders. Thus, this is a strong sign of how consumers are reacting to the affordability of homes. Home financing rates increased by .25% in January from under 4% the month before to 4.25%. They have gone higher since then.
Financial experts in the housing and mortgage industry reported the increase in rates seemed to have a strong effect on the number of closings that occurred. When mortgage rates move up this much, it is inevitable that there will be some cooling of home sales. But there is more to it than that.
Higher home prices are particularly occurring in the new home market. The median price for a new home across the country rose this year to $323,000. This is a 2.5% increase from a year ago. Builders seem to be jacking up prices and also are focusing on the buyers who are upgrading to a new home, and not entry level homes where they are needed the most.
There seems to be a serious shortage of existing, lower priced homes for sale, but the opposite seems to be happening with new homes. Supply has increased in housing starts to the highest levels since 2014. This is a sign that new home construction is out of reach for many people wanting their first home.
Some economists think fewer sales are possibly because of a saturation of new homes in the higher end of the market. This hopefully will cause builders in 2018 to follow what the market wants and build more affordable homes. This could be seen because the biggest drop in sales of new homes have been those above $500,000.
There had been expectations of an increase in the sale of new homes in January 2018 after the sharp December drop. This is common when rates rise initially; some say there is an initial reaction from buyers who need to get the home bought before rates rise more. This did not occur, most likely because people’s incomes did not rise enough to make the higher payments with the higher rates.
Home builders have noted a reduction in buyer traffic this month, says a monthly sentiment survey issued by the National Association of Home Builders. So far, the measure did not improve for February when rates went higher. But the confidence of builders is high. This is partially because of higher sales expected in the next six months.
As noted earlier, another factor in the softer home sales data is the tax overhaul that Trump passed. It is making it costlier to buy and own homes in the higher cost areas such as California, Washington state, New Jersey and New York. There are limits to the tax write offs on homes in these expensive areas. For example, you only can write off mortgage interest on a home worth up to $750,000 today, down from $1 million a year ago. Also, home owners can only write of $10,000 per year in property taxes and state taxes today. When you combine these facts with the higher rates, it is not surprising that home sales have slumped, especially in new homes.
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The takeaway is that we will see somewhat slower sales in 2018 in some areas as interest rates rise. But the good news is the economy is strong. That is usually one of the major reasons for rising interest rates. Unemployment is low at 4% and people are seeing rising wages. Rates are seen as leveling out in the mid to high 4s this year. If that prediction holds, we could see more homes sold towards the end of the year as people see an increase in their wages as the economy gets stronger.
It seems unlikely there will be a major housing bust, given the strength of the economy as a whole. But higher rates have indeed had an effect that may persist throughout this year.