By Lucia Mutikani

WASHINGTON (Reuters] – The unexpected fall in sales of U.S. single family homes during February was due to higher mortgage rates and rising house prices. This is causing some buyers to flee the market.

The Commerce Department reported a second consecutive monthly drop on Wednesday. However, sales remain above pre-pandemic levels. Economists expect a slower pace of affordability reduction activity, but they see reduced affordability as the main reason for the slowdown in new home building. This is due to the fact that there has been a lot of demand, record-low inventory of pre-owned homes, and high wage growth.

David Berson (chief economist, Nationwide, Columbus, Ohio) stated that interest rates are expected to rise further due to the negative supply shock from Russia’s invasion of Ukraine. Home sales will likely trend lower over the next few months. The drop in home sales is expected to be minimal if mortgage rates do not rise or the economy slows down. 

The number of new homes sold decreased by 2%, to an adjusted seasonally adjusted rate last month at 772,000 units. From the previous reported 810,000 units, January’s sales pace had been decreased to 788,000 units. In the Northeast, sales rose 59.3% and in the Midwest they increased 6.3%. They fell by 1.7% in densely populated South, and plummeted 13.0% in West.

As they count at the time of signing a contract, new homes can be a good indicator of the state and condition the housing market.

According to Reuters, economists had predicted that new home sales would increase by 11.4%, or 810,000 units, according to Reuters polling. On a year-on, basis sales fell 6.2% in February. The peak was at 993,000 units per month in January 2021. This is the highest level since 2006.

The Federal Reserve increased its policy interest rate 25 basis points in February. This was the Federal Reserve’s first major hike in three years. They also set out an aggressive strategy to reduce borrowing costs by 2023.

Data from the Mortgage Bankers Association on Wednesday showed that the 30-year fixed rate jumped 23 basis points to an all-time high of 4.50% for last week.

Wall Street stocks were falling as oil prices rose. A basket of currencies gained against the dollar. The yields on U.S. Treasury bonds fell.

SUPPLY-DEMAND IMBALANCE

Although mortgage rates are still low, historical data shows that they have increased significantly due to strong house price inflation.

Matthew Pointon (senior property economist, Capital Economics in New York) stated that “mortgage payments as an share of median family income has risen above 20%” for the first times since late 2007″. That will slow down the activity in housing markets. There is a record number of houses on the market, which means that new sales will only show a modest gain in 2022.

According to data last week, sales of properties previously owned dropped sharply in February.

In February, the median price of a new home increased by 10.7% to $41,600 from one year earlier. Comparable to 3 years ago, house prices have increased by 31%. Last month’s house sales were all above $200,000. The strong price rise in houses is expected to continue through this year as well as into 2023.

Robert Frick is a corporate economist with Navy Federal Credit Union. He said, “We might be approaching a pivotal moment when higher home cost and higher mortgage interest rates cool both sales growth and price increases but given that supply-and demand imbalance, it’s possible we won’t reach this point this year.”

The market saw 407,000 homes added, an increase of 9% from the 398k units that were available in January. About 65% of inventory consisted of homes under construction. Homes still being built accounted for 26%.

As builders face shortages of inputs such as lumber and cabinets for framing and high prices for appliances, garage doors and countertops, the backlog of houses that have been approved for construction is growing.

It would take 6.3 months for the inventory of homes to be sold at February’s pace, an increase from January’s 6.1 month.