High interest rates continue to suppress housing demand, with new home sales in the U.S. dropping to the lowest level in six months in July.

In July, new home sales in the U.S. significantly cooled down, falling to their lowest level in six months. Despite homebuilders continuing to attract buyers through price reductions, subsidizing mortgage rates, and offering free upgrades, high mortgage rates and housing affordability pressures are still suppressing market demand, particularly in the entry-level housing market where first-time homebuyers are located. Data released by the U.S. government on Tuesday showed that the number of signed sales contracts for newly built single-family homes in July dropped by 10.5% month-on-month, with seasonally adjusted annualized sales declining to 607,000 units, below the 620,000 units anticipated by economists surveyed by the media. Over the past four months, three of those months have seen a decline in new home sales in the U.S., further indicating that high financing costs continue to exert pressure on the real estate market. In terms of pricing, the median sales price of new homes in the U.S. fell by 0.9% year-on-year in July, reaching $393,800. In recent years, to address soft demand, many homebuilders have started stimulating sales through direct price cuts, offering free home upgrades, and helping buyers lower their mortgage rates. These measures have helped maintain market demand to some extent, but for first-time homebuyers with limited budgets, the combined issues of high home prices and high mortgage rates still present significant affordability challenges. D.R. Horton, Inc. (DHI.US), a major U.S. homebuilder focusing on entry-level housing, previously indicated that as demand from first-time homebuyers weakens, the company expects residential sales to be lower than previously anticipated this year. In contrast, the luxury housing market has shown relative resilience. Toll Brothers, Inc. (TOL.US), a luxury homebuilder, announced last week that the number of new residential contracts signed by the company increased during the three months ending in July. The company stated that its affluent clients are less sensitive to changes in mortgage rates, and many buyers can leverage the funds from selling their previous homes to purchase higher-priced new homes. This difference also reflects the evident segmentation in the current U.S. real estate market. High interest rates have a more pronounced impact on first-time homebuyers and price-sensitive consumers, while high-income households are relatively unaffected. In terms of supply, as of July, the number of new homes for sale in the U.S. fell by 1.6% year-on-year to 488,000 units. Based on the current sales pace, this inventory equates to about 9.6 months of supply, indicating that builders still need time to digest the previously accumulated inventory. With inventory levels remaining high, builders have proactively controlled the pace of new home construction, focusing more on selling existing homes for sale. This also explains why builders are still willing to offer price discounts and buyer incentives to facilitate transactions, despite facing high costs for land, construction, and financing. Regionally, there were significant disparities in new home sales performance across the U.S. In the South, the largest home buying region, new home sales fell by 13% month-on-month, with annualized sales dropping to 383,000 units. The Midwest experienced an even steeper decline of nearly 43%, reaching its lowest level since 2012. In contrast, new home sales in the West and Northeast regions showed some growth. As the real estate market cools, consumer confidence in the future economic outlook is also declining. Additional data released by the Conference Board on Tuesday showed that consumer confidence in August fell to its lowest level since the beginning of the year, with consumer attitudes towards future employment and income prospects becoming more pessimistic. For the housing market, expectations around employment and income are particularly critical. Purchasing a home typically involves taking on long-term, substantial financial commitments, and if consumers lack confidence in the stability of future income, even with builders offering discounts or financing incentives, they may postpone their home-buying plans. Overall, new home sales in the U.S. dropped by 10.5% in July to an annualized 607,000 units, not only falling short of market expectations but also hitting a six-month low. Amid high mortgage rates, constrained housing affordability, and weakening consumer confidence, builders' price cuts and incentives have not been sufficient to fully reverse the soft demand situation. However, new home sales data is inherently volatile month-to-month. The U.S. government stated that the 90% confidence interval for this sales change ranges from a decline of 24.5% to an increase of 3.5%, so single-month data needs to be interpreted in conjunction with trends over the coming months to determine the true trajectory of the U.S. housing market.