The Census Bureau reported new home sales for February that were 12.8 percent higher than a year ago. New home sales posted at a seasonally adjusted annual rate of 592,000, with the bulk of the sales increase coming from the Midwest region.. The median price of a new home contracted in February was $296,200, down from $311,300 last year. The average price of a new home contracted in February posted a surprisingly large increase to $390,400.

The big decline in median prices (down over $15,000) from last year likely helped to boost February sales. Mortgage interest rates also stabilized in February. Unusually warm weather in February probably helped activity as well as sales gains were concentrated in the Midwest. It will be interesting to see the revisions to new home sales in coming months. Home sales in general have held up pretty well with the rise in mortgage rates. That being said, the rise in mortgage rates didn’t last as long as many had feared. Treasury yields barely budged with this report, suggesting that economic activity in general is still lukewarm.

If you needed another reminder of the huge wealth and income inequality that exists in America today, the latest new home sales report provides another stark reminder. The abnormally large jump in average prices (up from $349,400 a year to to $390,400) suggest that more luxury homes were sold as well. It seems the Fed’s “wealth effect” is working for some people, even if it’s not helping the broader economy.

The gap between existing home sales and new home sales is still quite. Builders are going to have to offer more affordable homes to sustain sales momentum, and that is still a daunting task when there are few cheap lots to build on. The February report suggest that builders were making concessions to move moderately priced homes. Lennar’s latest earnings report provides confirmation of the higher sales concessions.

It will be interesting to see if home builders can replenish inventory with new affordable products that buyers are actually looking for. The disturbing gap between existing and new sales will likely continue to be a feature of the housing market for years to come thanks to the Fed’s distortion of the housing market.

New Home Sales vs Existing Home Sales