Home Sales in the South Drop as Housing Market Stalls

New homes sales in the southern United States fell substantially in January, even as the overall market saw an increase, albeit at a smaller than expected rate, data from the U.S. Census Bureau and Department of Housing and Urban Development showed on Monday.

The South recorded 358,000 single-family new homes sold last month, a nearly 16 percent decline from December. On the flip side, the Northeast reported a 72 percent increase in the amount of homes sold for the month. Nationally, sellers managed to close deals on 661,000 homes, a 1.5 percent jump from the end of 2023, less than the 684,000 forecast by Bloomberg economists.

"The smaller-than-anticipated increase in new-home sales in January is not concerning as weather likely dampened sales, particularly in the South," Ryan Sweet, chief U.S. economist at Oxford Economics, said in a note shared with Newsweek.

The January new homes sales came at a time when mortgage rates had declined to the mid-6 percent levels after they soared to two-decade highs in the fall of 2023. Falling rates and a strong economy amid tight monetary conditions suggests an optimistic outlook for the year, according to Sweet.

"The 30-year fixed mortgage rate is off its recent peak, job growth is strong, and inventories are not problematic for the new-home market," Sweet said. "Supply issues are noticeably more problematic in the existing-home market."

At the end of January, new houses available for sale hit 456,000, which is at about 8.3 months' worth of supply. The existing homes market, on the other hand, has struggled with supply as sellers find themselves owning mortgages that cost less than what they would get in the current market. This in turn has made them reluctant to sell, which has stifled supply.

Prices went up, with the median value of a new home sold at about $420,000 in January compared to $413,100 the previous month, according to government data. High prices and elevated mortgage rates have made it challenging for people to afford a home.

Mortgage rates hit 8 percent in October and fell to the 6.5 percent range to start the year on expectations that the Federal Reserve would slash rates in the first quarter of 2024. The central bank hiked rates to its current level of 5.25 to 5.5 percent, the highest in more than 20 years, to battle soaring inflation, which led to an increase in borrowing costs, including for home loans.

While inflation has cooled from the four-decade high of 9 percent in the summer of 2022, it has yet to drop to the Fed's target of 2 percent.

In January, Consumer Price Index inflation accelerated by 3.1 percent. The still-high inflation numbers have investors expecting policymakers to wait until the summer to begin cutting rates, pushing up mortgage rates to about 7 percent.

"Though new-home sales rose in January, they are not rising rapidly," Sweet said. "This is not surprising because affordability remains an issue as prices continue to rise, and banks continued to tighten lending standards on mortgages, but to a lesser extent than in past quarters."

For the new homes market, despite the elevated rates, builders are offering incentives for buyers.

"Almost two-thirds of builders are offering some form of sales incentives, which include mortgage rate buydowns," Yelena Maleyev, KPMG's senior economist, said in a note shared with Newsweek. "This is one of the reasons behind the divergence in sales activity between new and existing homes."

The mortgage rate outlook for the rest of the year depends on when the Fed starts cutting rates, she added.

"The concern is mortgage rates and how they respond to changing market conditions," Maleyev said. "If inflation and employment data continue to come in stronger than expected, then expectations for interest rate cuts by the Federal Reserve will be pushed out into later in the year. Upside surprises to economic data will keep mortgage rates elevated as well, dampening demand."