Why New Home Sales Hit An Unexpected High In February
February saw frigid temperatures in most states, but the housing market was hot. Commerce Department data revealed Tuesday that sales of new homes in the U.S. hit an unexpected seven-year high in February, reports the Associated Press.
Despite severe weather across the country, which usually has a negative impact on the housing market, sales rose 7.8 percent — the most since February 2008.
The Commerce Department's report also showed that the median sales price of a new house rose 2.6 percent from February of last year to $275,500.
According to Bloomberg, the surge in demand was largely seen in the Northeast, which was a record-breaking 153 percent increase. In the South, there was a 10.1 percent gain. Despite these impressive numbers, purchases actually fell in the Midwest and West.
Historically Low Mortgage Rates Fuel New Home Sales
Credit remains tight, but historically low mortgage rates are contributing to the increase in new home sales. Bloomberg reports that the average 30-year, fixed-rate mortgage decreased to 3.78 percent in the week ending March 19, which is close to the 3.31 percent rate in November 2012 — the lowest rate dating back to 1971.
Stan Shipley, an economist at Evercore ISI in New York, told Bloomberg, "It looks like the spring selling season is off to a good start. With low mortgage rates, if you look at it, it's very affordable for most potential homeowners.
The unemployment also rate dropped from 6.7 percent to 5.5 percent, and employers added more jobs than expected in February. More jobs means more paychecks, which translates to more potential home buyers.
Earlier this year, Shipley predicted 485,000 sales in a Bloomberg survey — the closest estimate any analyst came to the actual figure. The median forecast in the Bloomberg survey showed economists expected the pace to fall to 464,000, and the Commerce Department revised the January reading up to a 500,000 pace. The market outperformed all expectations and saw a 539,000 annualized pace.
Housing Inventory Remains Low As Prices Rise
Median home prices might be rising, but inventory still remains very low. The supply of homes is the lowest it's been since June 2013. There were only 210,000 new houses on the market at the end of February.
Existing home sales are also suffering. According to data from the National Association of Realtors, existing home sales fell short in February for the second month, reports the Associated Press.
Despite slower sales, the prices of existing homes increased 7.5 percent to a median of $202,600. This increase in price excludes many would-be homeowners from jumping into the market.
In addition, income gains are also still slow, which adds another restraint to home buying. Bloomberg reported average hourly earnings only rose 2 percent in February, which was less than predicted. Also, other parts of the housing market are still struggling.
According to the Associated Press, sales of existing homes in January and February are behind pace. And, builders are focusing on rental markets, as high prices are limiting the number of potential buyers.
Will The Housing Market Continue To Improve?
The key to keeping the momentum going might lie in keeping mortgage rates low and increasing inventory. Mortgage rates have plunged from their 52-week high of 4.41 percent, and more new home inventory is on the horizon.
The Bloomberg homebuilders index saw its highest level last week since July 2014, and Los Angeles-based KB Home (NYSE: KBH) said first quarter orders rose 24 percent in volume and 25 percent in value from same time period the previous year.
KB Home Chief Executive Offer Jeffrey Mezger reportedly said in a conference call with analysts, "Initial indications of demand have been encouraging. Our increasing traffic is a strong indication that demand is on the rise."
The following article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.