Sales of new homes tumbled for the second month in a row as inflation rises and mortgage rates tick upward.
New home sales fell 2% in February to 772,000, below forecasters’ expectations, according to a report from the Census Bureau released on Wednesday. The news comes after sales dropped 4.5% in January, which was also a bigger decline than expected.
Mortgage rates have been on the rise as the Federal Reserve begins reversing the easy-money policies it implemented about two years ago at the start of the COVID-19 pandemic.
Mortgage rates rose quickly in February as the Fed prepared for its first interest rate hike to curb inflation. As of Wednesday, the average 30-year fixed-rate mortgage was 4.16%, up more than 1 percentage point from a year before, according to Freddie Mac. Last week, the Fed announced it would raise its interest rate target, which is a separate short-term rate, by a quarter percentage point.
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Still, the Wednesday report found that the median sales price of a new home increased by 10.7% for the 12 months ending in February, ballooning to $400,600.
“The outlook for new home sales is filled with storm clouds, with Washington stimulus fading further in the rearview mirror and the Federal Reserve moving aggressively to take the punch bowl away and push mortgage and interest rates back to where they were before the pandemic,” FWDBONDS Chief Economist Christopher Rupkey said.
“It is right there in the Fed’s monetary policy playbook, slow economic demand by pushing rates high enough to hit interest-sensitive sectors of the economy like housing and autos hard,” he added.
The meteoric rise in mortgage rates has made housing much less affordable for homebuyers. The payment on a typical mortgage loan increased by about $500 per month just in the past few weeks, according to Freddie Mac’s deputy chief economist. Inflation-adjusted mortgage payments are also at their highest level in more than two decades.
Sales of existing homes also tumbled last month as housing became less affordable across the country.
Existing-home sales declined by 7.2% in February to a seasonally adjusted annual rate of 6.02 million, according to a report by the National Association of Realtors.
“Housing affordability continues to be a major challenge as buyers are getting a double whammy: rising mortgage rates and sustained price increases,” said Lawrence Yun, the NAR’s chief economist. “Some who had previously qualified at a 3% mortgage rate are no longer able to buy at the 4% rate.”
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Red-hot inflation is contributing to consumers’ economic woes. Inflation exploded to 7.9% for the 12 months ending in February, the highest level since 1982. While energy prices led the headline number, consumer staples, including food, have also increased in price.
