Here’s why new home sales inch higher despite 7% mortgage rates

“There’s more opportunity in new construction,” said Nicole Bachaud, a senior economist at Zillow Group.

About 693,000 new single-family houses were sold in March, up 8.3% from a year ago, according to the U.S. Census Bureau and the U.S. Department of Housing and Urban Development. The median sales price was $430,700, the agencies found.

Meanwhile, sales for previously owned homes dropped by 3.7% from March 2023, the National Association of Realtors found.

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Many areas in the U.S. face a low inventory of existing homes as the mortgage rate lock-in effect, or the golden handcuff, keeps “existing owners from becoming sellers,” Bachaud explained.

With 30-year fixed-rate mortgage rates sitting above 7%, homeowners who bought at much lower rates in recent years don’t like the prospect of trading in their low rate for a higher one.

Meanwhile, buyers are turning to builders, who are typically more flexible with pricing. Homebuilders offer buyers incentives like rate buy-downs and price cuts. Homebuilders can even pay for closing costs, experts say.

“This has been helping incentivize some potential buyers to turn to the new home sales market,” said Matthew Walsh, assistant director and economist at Moody’s Analytics.

While new builds are still sold for slightly more than existing homes, the price gap has significantly narrowed since the fall.

“Prices are much closer to parity than during any point in the last three decades,” Walsh said.

Over the last six months, the median price for a new home is only about 4% higher than the median price of an existing house. That level is significantly lower than before the pandemic when the median price of a new home was more than 40% higher than an existing house, Walsh explained.

“On the existing side, you have such a tight supply for sale,” he said. “But on the new homes side, you have builders prioritizing transaction volumes over margins.”

In the past, price-sensitive buyers with tighter budgets were limited to the existing homes market. Nowadays, buyers who remain looking might have more options on the new home sales side.