New home sales are beginning to slide as rising rates clamp down on the housing market euphoria. The Census Bureau reported February new home sales at a seasonally adjusted annual rate (SAAR) of 772,000 units. That’s a 2 percent slide from January and down 6.2 percent from last year.

The unadjusted February sales estimate shows 65,000 new homes sold. That translates to a 7 percent slide year-over-year. The median price of a new home came in at $400,600. The average price posted at $511,000, a new record high for the series. It’s interesting to note that the median new home prices was down over $27,000 from February. There were 401,000 new homes for sale at the end of the period, but 105,000 had not started construction. There were only 37,000 completed new homes for sale at the end of February. In other words, there’s not much to look at if you want to go out and actually buy a new home.

If builders want to maintain sales momentum for the rest of the year, it will be critical for those median prices to stay within reach of prospective buyers. In recent months buyers have been falling all over themselves to buy up just about anything builders could offer. That’s changing as rates blow out to the upside.

The Mortgage Bankers Association and CoreLogic have both noted how marginal buyers are getting pinched in this housing market as affordability gets crushed. This was from the MBA earlier today.

“Purchase application volume was down slightly for the week, with a larger drop in FHA and VA purchase volume, and a small decline in conventional purchase loans. First-time homebuyers, who rely on these government programs, are increasingly challenged by both the rapid increase in home prices and higher mortgage rates.”

That leaves repeat and move-up buyers as the primary audience for expensive new homes. As evidenced by the frenzied activity here in Texas, there are still plenty of buyers taking the leap. The question is how many are willing to take a contract all the way to closing as rates continue to push higher.

Here in North Texas there are still waiting lists for many of the new homes technically available. At the same time, I’m seeing some homes bust out and come back to market. We’re still very early in the game in terms of the Federal Reserve’s policy normalization. So far Jerome has done nothing but talk. The test for the new home market will be when mortgage rates hit 5 percent and move higher. How many buyers will still be willing to throw down half a $million on new construction and very little dirt to go with it?

Median new home prices already appear to be stalling out. As relative affordability gets crushed with spiraling interest rates, average new home prices should soften as well.

U.S. New Home Prices February 2022