Sales of new U.S. homes fell more than expected in October as a spike in mortgage rates weighed heavily on consumer demand.
New single-family home purchases plummeted 5.6% to a seasonally adjusted annual rate of 679,000 units, the Commerce Department reported Monday. Economists surveyed by Refinitiv expected new home sales — which account for a small percentage of total sales — to come in at a rate of 723,000 units.
Sales remain up about 17.7% from the same time one year ago.
"Despite the month-over-month decline in sales, the pace of new home sales is on track with the pre-pandemic rate," said Jeffrey Roach, chief economist at LPL Financial. "Amid extremely low inventory of existing homes on the market, new home sales will likely remain robust to meet the demand."
At the current pace of sales, it would take roughly 7.8 months to exhaust the inventory of existing homes. Experts view a pace of six to seven months as a healthy level.
The decline in sales indicates that a resurgence in mortgage rates last month pushed many would-be buyers out of the market. As consumer demand fell, so did prices.
The median price for a new home dropped to $409,300 last month. Still, that remains far higher than the typical pre-pandemic level.
The Federal Reserve's aggressive interest-rate hike campaign sent mortgage rates soaring to a two-decade high in October, further cooling the housing market.
But mortgage rates have retreated noticeably since then as many investors believe the Federal Reserve is done hiking interest rates.
Rates on the popular 30-year fixed mortgage fell to a two-month low of 7.44% last week, according to Freddie Mac, down from a high of 7.79% at the end of October but well above the pre-pandemic average of 3.9%.
As mortgage rates continue to fall, experts believe that new construction will serve as a vital component of home sales heading into 2024.
"Not only have mortgage rates already fallen from their October peak, but builders are also making the math work for prospective home buyers by offering a combination of small price cuts and other incentives — such as rate buydowns and closing cost credits," said Orphe Divounguy, Zillow senior economist.