Lower rates fuel fastest pace of home sales in over a year

New-home sales in the U.S. jumped to a more than one-year high in September as customers responded to more incentives from builders and a drop in mortgage rates. 

Sales of new single-family homes increased 4.1% last month to a 738,000 annualized rate, government figures showed Thursday. The median estimate of economists surveyed by Bloomberg called for 720,000.

The boost may be short-lived. After dropping to a two-year low last month, borrowing costs have climbed again on expectation that the Federal Reserve will take a more gradual approach to interest-rate cuts in coming months.  

"The increase in new home sales in September was probably supported by the fall in mortgage rates last month," Ruben Gargallo Abargues, an associate economist at Capital Economics, said in a note. "Rates have rebounded since then, however, which lends support to our view that new home sales will not rise much further."

By region, sales in the South climbed last month to the fastest rate since April 2021. Purchases also picked up in the Northeast. 

Meantime, the median sales price was little changed from a year ago, at $426,300. Still, prices remain almost 30% higher than at the end of 2019.

With housing affordability gauges near historic lows in the country, builders have been offering incentives such as discounts or mortgage-rate buydowns to help sell homes. This week, Atlanta-based builder PulteGroup Inc. said during its quarterly earnings call that the need for more sweeteners will continue for the rest of the year. 

Builders are working to sell off inventories that are hovering near records after ramping up construction during the pandemic recovery. The supply of new houses rose 0.4% in September to the highest level since 2008. 

The industry is already looking ahead to the crucial spring selling season. An index of builder sentiment published by the National Association of Home Builders reached the highest level in four months in October, fueled partly by the prospect of lower mortgage rates.

New-home sales are seen as a more timely measurement than purchases of previously owned homes, which are calculated when contracts close. However, the data are volatile. The government report showed 90% confidence that the change in new-home sales ranged from a 10.6% decline to a 18.8% gain.

Separate data Thursday showed weekly jobless claims fell back to levels seen before two hurricanes hit the Southeast. And business activity expanded at a solid pace through most of October on resilient services demand.