WASHINGTON – Higher mortgage rates and home prices, as well as increased construction costs contributed to lackluster new home sales in February, but signs point to improvement later in the year.

Sales of newly built, single-family homes in February increased 1.1% to a 640,000 seasonally adjusted annual rate (the number of homes that would sell in one year at the current month’s rate) from a downwardly revised reading in January, according to newly released data by the U.S. Department of Housing and Urban Development and the U.S. Census Bureau.

However, new home sales are down 19% year-to-year.

“The lack of existing home inventory means demand for new homes will rise as interest rates decline over the coming quarters,” says Alicia Huey, chairman of the National Association of Home Builders (NAHB). However, Huey also notes builders’ ongoing challenges, including “higher interest rates, elevated construction costs and access to critical materials like electrical transformers.”

NAHB Chief Economist Robert Dietz says February’s data “points to an increase for the monthly pace of single-family construction starts later in 2023 given a rise in builder sentiment and an increase for sales of homes not yet started construction.”

Dietz’s top concern, though, is possibly tighter credit conditions stemming from recent bank problems. He says that could impact acquisition, development and construction loans for smaller builders.

New single-family home inventory fell for the fifth straight month. The February reading indicated an 8.2-months’ supply at the current building pace. A measure near a 6 months’ supply is considered balanced. However, single-family resale home inventory stands at a reduced level of 2.5 months.

The median new-home sale price rose in February to $438,200, up 2.5% year-to-year, based largely on elevated costs of construction. A year ago, roughly 15% of new-home sales were priced below $300,000; that share is now just 10%.

On a year-to-date basis, new home sales fell in all regions: Down 29.2% in the Northeast, 21.3% in the Midwest, 7.3% in the South and 40.6% in the West.

A new home sale registers when a sales contract is signed or a deposit is accepted. The home can be in any stage of construction: not yet started, under construction or completed. In addition to adjusting for seasonal effects, the February reading of 640,000 units is the number of homes that would sell if this pace continued for the next 12 months.

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