New home sales crater to slowest pace in more than 6 years as higher mortgage rates pummel the housing market

• New home sales plunged to an annualized pace of 511,000 units in July, the Census Bureau said.
• That landed below the median forecast of 575,000 units and marked the slowest rate since January 2016.

Higher mortgage rates just took another bite out of the housing market.

Sales of new single-family homes in the US tumbled to an annualized pace of 511,000 from 585,000 in July, the Census Bureau said Tuesday morning. Economists surveyed by Bloomberg expected sales to slow more gradually to a 575,000-unit pace. The reading reflects a 12.6% drop through July and the slowest overall pace of sales since January 2016.

The median sales price for new homes sold in July rose to $439,400, according to the report. While that's up from June's reading, it still falls shy of the level seen in May. The government's estimate of the number of new homes for sale rose to 464,000 from 450,000, marking the highest number of available units since March 2008.

The report is the latest to show the housing market in rapid decline. The buying bonanza of 2021 quickly gave way to a significantly cooler market as rising mortgage rates crushed buyer demand.

Yet prices have continued to climb due to persistently strained inventory. Elevated material costs continue to weigh on homebuilders and hinder attempts to speed up construction. Waning demand and rising prices helped pull homebuilder confidence into contractionary territory in July, signaling the US is in the midst of a housing-market recession.

"It's reasonable to assume that the steepest declines in sales are behind us, though they likely will fall a bit further. For new home prices, however, the worst is yet to come," Ian Shepherdson, chief economist at Pantheon Macroeconomics, said in a note.

Another factor slowing demand is the much higher cost of taking out a mortgage than was seen over the previous few years. The average US fixed rate for a 30-year mortgage came in at 5.13% last week, Freddie Mac reported in its weekly mortgage market survey. Although the rate fell from the previous week's reading of 5.22%, it is still a significant increase from a pandemic low of 2.68% in December 2020.

"The market continues to absorb the cumulative impact of the large price and rate increases that led to a plunge in affordability," Sam Khater, Freddie Mac's chief economist, said in a statement. "As a result, over the rest of the year purchase demand likely will continue to drag, supply will modestly increase, and home price growth will decelerate."

Mortgage rates have been on a proverbial seesaw as the Federal Reserve combats soaring inflation by raising interest rates. Rate hikes have increased the cost of homeownership making housing far less affordable for many Americans. It has led to a decline in purchasing demand — and ultimately a slowdown in the real estate market.

Data from the National Association of Realtors shows that sales of previously owned homes are also on the decline. According to the organization, in July, existing home sales declined for the sixth consecutive month to a seasonally adjusted annual rate of 4.81 million units. Not only is this rate down 5.9% from June's pace — and 20.2% from the year-ago rate — it also marks the slowest rate of sales since May 2020.

"We're witnessing a housing recession in terms of declining home sales and home building," Lawrence Yun, the chief economist at the National Association of Realtors, said. "However, it's not a recession in home prices. Inventory remains tight and prices continue to rise nationally with nearly 40% of homes still commanding the full list price."