Home Builders Boost Prices Amid Rising Rates

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Despite a major jump in mortgage interest rates in June, the nation’s home builders continued to pass on their own cost increases to buyers. The median sale price of a newly built home was $249,700, a 7 percent increase from a year ago.

“Demand is still there and we are able to raise price,” said Debbie Rosenstein, VP of sales and marketing for The Christopher Companies, a small regional builder serving the mid-Atlantic region. “We are getting pricing increases from our subcontractors and material costs are going up.”

(Read more: Investors Are Moving Out of Housing)

Mortgage rates jumped over a full percentage point from May through June of this year, robbing home buyers of much-needed purchasing power. While they have now settled back a bit, they are far from the record lows of the past two years.

“The recent increase in mortgage rates hasn’t slowed demand, as long as home affordability remains high,” noted Bob Walters, chief economist at Quicken Loans. “We are, however, seeing an increased urgency from potential new home buyers as they move to secure today’s historically low rates.”

New home sales jumped more than 8 percent month-to-month in June, but May’s sales numbers were revised sharply lower, and prices, while up from a year ago, are down 11.5 percent from April. That has some housing skeptics less optimistic about the builders’ prospects.

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“Remember, last month on the ‘strong’ but FAKE new home sales print of 476k, home builders rallied, and every bull took a huge victory lap. Today we learned that was all garbage,” noted California-based analyst Mark Hanson. “Bottom line: May was a huge miss. Prices have tumbled as rates surged. And June is suspect because of the huge lower May revision.”

Home builder sentiment jumped to a seven-year high in July, as expectations for future sales soared. Supplies of newly built homes for sale, however, are still very tight, as are supplies of existing homes. The home builders have been deliberately slowing production in order to deal with labor and material constraints and also to gain pricing power.

(Read more: How a Greener Home Could Get You a Bigger Mortgage)

As for demand, move-up buyers are coming back, but first-time homebuyers are still struggling. Higher prices are not helping that segment.

“The housing market is improving on the fringes, but not at the core, which may take another year depending on the impact of interest rates which we know are heading north,” said Stephen Paul of Mid-Atlantic Builders.
Single family housing starts fell in June and are running at about half the rate of an historically average housing market.

—Follow Diana Olickon Twitter @Diana_Olick.

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