The conversation regarding the housing market is largely centered around one factor: mortgage rates. The Federal Reserve started hiking rates last year in an attempt to tamp down on growing inflation. Since then, several increases in rates have led to mortgage rates jumping to over 7%.
Consequently, the housing market has come to a standoff of sorts. Both buyers and sellers are hesitant to make a move in the face of these higher rates. Buyers are being confronted with elevated monthly payments, while many sellers are reluctant to list their homes and lock in a new mortgage at the current rates.
According to data from the Minneapolis Area Realtors, inventory of homes in the Twin Cities metro area was down 16% in July from the same time last year. Meanwhile, closed sales were down 21% for the same period.
Buyers explore new construction
Earlier this summer, there was a notable shift in market activity as more buyers turned toward new construction to fill the gap in the existing market. Builders, in response, started to ramp up production to meet demand.
As of the second quarter of 2023, new homes made up one-third of all the homes available for sale, according to online Realtor firm Redfin. Pre-pandemic, new homes made up just 17% of the market.
Locally, homebuilders pulled permits for 446 single-family homes during July, a 38% increase from 2022.
That’s good news for Minnesota’s undersupplied housing market and for buyers who are not finding what they’re searching for in the existing segment. Additionally, buyers are discovering other benefits that come with purchasing a new home, such as rate buydowns from builders and avoiding the competitive environment of the existing market.
According to the Mortgage Bankers Association, applications for mortgages on new homes were up 35% year-over-year in July.
Builder confidence ebbs as rates climb
With demand high and the existing home supply limited, builders began to show more confidence in the market going into the summer months.
According to the National Association of Homebuilders (NAHB), builder sentiment toward the market was up in July. This monthly survey measures builder perceptions of various market factors, such as prospective buyer traffic and future sales expectations.
However, the new construction sector is not immune to the influence of rising mortgage rates. Just this month, builder confidence fell, snapping a seven-month streak of increases. According to NAHB, although demand for housing has not waned, higher rates are making for higher monthly mortgage payments and putting pressure on what buyers can afford.
“Although builders continue to remain cautiously optimistic about market conditions, the quarter-point rise in mortgage rates over the past month is a stark reminder of the stop and start process the market will experience as the Federal Reserve nears the end of the ongoing tightening cycle,” said Robert Dietz, NAHB’s chief economist.