Sky-high mortgage rates leave homes unaffordable for more buyers in US

Sales of new U.S. homes hit a 5-month low in August 2023, as sky-high mortgage rates continue to strain prospective homebuyers’ ability to afford a dwelling. (AP Photo/Matt Rourke, File)

LOS ANGELES  — Sales of new U.S. homes hit a 5-month low last month as sky-high mortgage rates continue to strain prospective homebuyers’ ability to afford a dwelling.

The pace slowed 8.7 percent in August from the previous month to a seasonally adjusted annual rate of 675,000 properties, the Department of Commerce reported this week. Economists polled by FactSet had expected the annual pace to reach 700,000 homes.

“Homebuilders are still benefiting from very low inventory of existing homes for sale, which has driven more buyers to consider new construction, but with mortgage rates elevated and home prices high, affordability is a growing concern for homebuyers,” said Lisa Sturtevant, chief economist at Bright MLS.

READ: US consumer confidence dives to four-month low; home sales tumble

Mortgage rates are near a 23-year high, forcing many would-be buyers to the sidelines. The average rate on a 30-year mortgage moved above 7 percent in August for the first time since November and has stayed above that threshold since then, according to mortgage buyer Freddie Mac.

Added cost

High rates can add hundreds of dollars a month in costs for borrowers, limiting how much they can afford in a market already unaffordable for many Americans.

Still, new home sales are up 1.8 percent through the first eight months of this year compared to the same period in 2022. By comparison, sales of previously occupied U.S. homes are down 21 percent in the same period.

Homebuilders have been able to mitigate the impact of the elevated mortgage rates on their sales by lowering prices and offering incentives like paying buyers’ closing costs or buying down the rate on their mortgage.

They’ve also wooed more buyers as the inventory of previously occupied homes has fallen to a near-historic low of 1.1 million properties.

Affordability hurdle

Even so, mortgage rates at current levels represent an affordability hurdle that many house hunters are increasingly unable, or unwilling to take on.

That fact isn’t lost on homebuilders. The NAHB’s builder confidence index fell this month below 50 for the first time since April, with builders’ expectations for sales over the next six months declining sharply. Readings below 50 indicate negative sentiment about the housing market.

While some homebuilders were able to offset the increase in mortgage rates last month with rate buydowns and other incentives, rates kept climbing in September. That suggests a further weakening of new home sales this month, said Robert Dietz, chief economist for the National Association of Home Builders.