The Census Bureau reported December new home sales of 536,000 (seasonally adjusted annual rate). This was a 10 percent drop from the revised November numbers and well shy of expectations. Unadjusted new home sales (38,000) were flat year-over year. The average price of a new home contracted in December 2016 was $384,000 while the median price posted at $322,000, near the highs for 2016.

So what happened to the lofty expectations of higher new home sales? In a word it it was an AFFORDABILITY problem. The real estate pundits who were expecting higher mortgage interest rates to have minimal effects on all of that “pent up demand” were re-acquainted with the concept of gravity. The reality is that mortgage rates above 4 percent are a significant headwind to the housing market, particularly when the Fed has done such a bang-up job of re-inflating asset prices to the moon once again.

Mortgage Interest Rate Trend

Looking at new home sales vs mortgage rates you can see the tug of war that is in play. While everyone has been cheering the “recovery” few people have stopped to question the manipulation that produced it. The real estate industry has been no exception in this regard. Higher home prices may be great for those who already own assets, but artificial inflation without accompanying wage growth is guaranteed to cause unsustainable bubbles.

New Home Sales Vs Mortgage Rates