Sales of new homes in October were much stronger than expected and rose to record rates, signaling that consumers might be rushing to buy homes before mortgage rates get too high. The U.S. Department of Commerce said Tuesday that sales of new homes in October rose 13% from the September annualized rate. The seasonally adjusted annual rate for October was 1.42 million, topping July's record of 1.37 million and surpassing September's revised rate of 1.26 million. The October pace was 9% above the rate from a year earlier. Economists were expecting new-home sales to drop to a 1.2 million rate in October, according to Reuters. The 13% rise in the sales rate was the highest monthly jump since 1993, according to Wachovia research. Sales prices also remained strong. The median sales price of new homes sold in October rose to $231,300 from $229,200 a year ago. The revised September median sales number was $227,700. On the inventory side, the total level of homes for sale increased slightly, while the monthly supply rate dropped due to the increased sales pace. The seasonally adjusted estimate of new houses for sale at the end of October was 496,000, which represents 4.3 months of supply at the current sales rate. This was a drop from the 4.7 months of supply at the end of September, when an estimated 490,000 new homes were for sale. Industry watchers said the strong new-home sales point to consumers looking to buy a home before mortgage rates rise further after more expected rate hikes by the Federal Reserve. "I think part of it is some fence sitters jumping in the market here," says Nick Buss, senior vice president with PNC Real Estate Finance, which provides financing to homebuilders. "I think everyone agrees the sub-6% (mortgage) rate is probably gone for a while."
According to Freddie Mac, the average rate on a 30-year mortgage was 6.07% in October, up from 5.77% in September. At the end of last week, the rate had crept up to 6.28%, which still is somewhat low historically. And with many expecting the Fed to raise the fed funds rate an additional 25 basis points at each of its next two meetings, mortgage rates are expected to climb higher, which could slow down housing sales next year. Phillip Neuhart, an economic analyst with Wachovia, expects housing sales to remain strong through the end of the year because of the relatively low mortgage rates. But he expects housing to eventually decelerate because of higher mortgage rates. But any expected price declines could be thrown out the window based on what the Fed does with its interest rate hike campaign. "I think the key thing to watch, the only thing that matters, is whether the Fed backs up its interest rate hikes," says Jim Poyner, an analyst with Palladian Research who covers homebuilder stocks. As long as mortgage rates continue to climb, Poyner expects year-over-year pricing comparisons to turn negative within the next six months, which he says will result in eroding gross margins for the homebuilders With inventories of homes continuing to ramp up across the country, builders are now in a precarious situation, Poyner says. "Now is where things get a little sticky for homebuilding companies because they're going to start making decisions now about just how patient they want to be in moving this inventory -- particularly as they see the inventory of finished houses increase," he says. The sales data helped homebuilder stocks rebound from Monday's news of
lower-than-expected existing-home sales. The Philadelphia Stock Exchange Housing Sector Index was up 1.3% in morning trading, with Lennar ( LEN - Get Report) rising 1.2% to $58.36, Pulte Homes ( PHM - Get Report) gaining 1.5% to $42.17, and Centex ( CTX) rising 1.3% to $73.62.