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

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March new home sales beat expectations despite weak inventory

As the spring housing market is plagued by low supply, high prices and rising interest rates, potential home buyers are focusing on new construction.

The reason? New homes offer more incentives and availability than previous homes.

“New construction offers more opportunity,” said Nicole Bachaud, senior economist at Zillow Group.

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

Meanwhile, condo sales fell 3.7% since March 2023, the National Association of Realtors found.

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

With interest rates on 30-year fixed-rate mortgages topping 7%, having to trade in their low interest rate for a higher one isn't exactly pleasing to homeowners who have purchased at much lower interest rates in recent years.

Buyers are now turning to property developers, who tend to be more flexible when it comes to pricing. Home builders offer buyers incentives such as discounts and price cuts. Home builders can even pay closing costs, experts say.

“This has helped encourage some potential buyers to turn to the new home sales market,” said Matthew Walsh, deputy director and economist at Moody's Analytics.

The price difference for new buildings is decreasing

Although new buildings are still sold at a slightly higher price than existing properties, the price difference has narrowed significantly since autumn.

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

Over the past six months, the average price of a new home has been only about 4% higher than the average price of an existing home. That level is significantly lower than before the pandemic, when the average price of a new home was more than 40% higher than that of an existing home, Walsh explained.

“There is such a tight supply for sale on the existing site,” he said. “But on the new home side, there are builders who are prioritizing transaction volume over margins.”

In the past, price-conscious buyers with tighter budgets were limited to the existing property market. Today, buyers who continue to search may have more options when selling new homes.