The Census Bureau reported that new home sales in the United States climbed to a seasonally adjusted annual rate (SAAR) of 694,000 in March. This represents a sales increase of almost 9 percent compared to last year. Sales for January and February were also revised higher. The median price of a home sold in March was $337,200 while the average price of a new home contracted in March was $369,900 according to Census estimates. While the median price climbed in March, the average price of a new home in the United States declined by $14,500 or roughly 3.7 percent.

This is the dilemma facing new home builders as mortgage interest rates now sit near 4-year highs. New home builders need to build more affordable homes to maintain sales momentum because the payments on those new homes have risen even without any price increases. The Dallas Fort Worth area is not immune to this problem, recently landing on a list of major metro markets with large monthly housing cost increases. It was estimated that the cost of an entry-level home in the DFW market went up by $136 from just last year to $1641 per month.

Monday’s existing home sales report from the National Association of Realtors¬†showed a year-over-year decline of 1.2 percent with existing sales posting at a seasonally adjusted rate of 5.60 million units in March…

The unwelcoming news is that while the healthy economy is generating sustained interest in buying a home this spring, sales are lagging year ago levels because supply is woefully low and home prices keep climbing above what some would-be buyers can afford.” Lawrence Yun

It remains a bifurcated market with top-down and bottom-up price compression. The split in the markets should not come as a surprise because it was an inevitable result of the Federal Reserve’s interventions in the markets. As I was explaining to a friend yesterday, there are no affordable homes to be found in most markets because the Fed directly facilitated their removal from the market. Wall Street hedge funds and investors have been gobbling up affordable homes and turning them into rentals, in many cases renting them out to the same people who were foreclosed on during the Great Recession.

Today the yield on the 10-Year Treasury bond hit 3 percent. If rates continue to rise, you can expect the U.S. housing market to cool in response. Buyers are struggling to keep up with rampant home price inflation, and now that rates have moved up, they are doing what they can to manage payments. That could mean buying a smaller house, getting a townhome instead of a single-family detached property, buying further away from work or opting for an older home. None of those choices are optimal, but they are now necessary for many prospective home buyers since the Fed has reflated asset prices across the spectrum.

The home construction index has cooled significantly since the start of the year. This is no coincidence. You can see a similar YTD decline in the share prices of major U.S. homebuilders. Contrary to the incessant spin that debt levels and prices don’t matter, they most certainly do when the payments begin to rise on those artificially inflated assets. Anybody who tells you different is likely selling something. As the saying goes…“Caveat Emptor”

It is important to note that the Census estimates are highly volatile and subject to major revisions. The confidence interval on their numbers is often laughable. Also keep in mind that the Census counts a new home sale at the time of contract signing, so that contract might never even close.

Actual sales data from the DFW area (NTREIS) shows a 13.6 percent increase in new construction sales for the month of March with average prices that were 3.2 percent lower than last year. Median prices for new homes in the DFW market also fell by 3 percent compared to last year. With higher mortgage interest rates, any increase in prices will likely be met with a subsequent fall in sales. It’s basic economics, supply and demand. DFW resale activity declined 6.9 percent in March. Why?…because average resale prices were 7 percent higher than March of last year. Go figure!