The last bastion of the housing market faltered last month.
Sales of newly built homes decreased 8.7% to a seasonally adjusted rate of 675,000 units last month from the revised July rate of 739,000, according to the Census Bureau on Tuesday. That was much worse than the Bloomberg consensus expectation of a 2.2% monthly decline to 698,000 units for August.
The pace of sales, though, was 5.8% above year-ago levels.
The decrease in activity reverses much of the good fortunes homebuilders enjoyed this year and underscores how even higher mortgage rates are blunting all corners of the housing market — despite attractive incentives.
"Tight inventories of existing homes for sale have pushed some buyers toward the new construction market. That said, that market is, of course, also affected by uncertainty and higher financing costs, although builder incentives can help offset these to some degree," Keith Gumbinger, vice president of HSH.com, wrote in his weekly Market Trends analysis. "Homebuilder moods are starting to reflect the change of seasons and in market conditions. Builders may have a bit more of the blues in September because building activity slowed in August."
The decrease in new home sales came as mortgage rates marched higher in August, hitting a 22-year high of 7.23%, per Freddie Mac. Rates have remained above 7% for six straight weeks and will likely remain above that threshold for the foreseeable, experts say.
Elevated rates have also been hammering the resale market, with sales of previously owned homes sliding to the lowest level for the month of August since 2010, National Association of Realtors chief economist Lawrence Yun said on a press call on Thursday. The pace, which was down 15.3% year over year, was also the third slowest of the current housing cycle.
Rates have also convinced homeowners to stay put rather than sell, further shrinking inventory among existing homes. That dynamic, for awhile, boosted sales in the new home market. But all bets are off the table as mortgage rates continue to rise.
"In the short run, it’s possible that rates may go up to 8%," Yun said last week.
That would put even more pressure on homebuilders to offer incentives to close on deals, something that’s happening already.
"A majority of builders are using incentives, including trimming prices and offering financing assistance," Gumbinger said ahead of the report. "We’ll learn how successful those incentives were in getting buyers to sign the dotted line."
For instance, D.R. Horton (DHI) is currently offering a limited time opportunity to lock in a 30-year fixed rate on certain government-backed home loans as low as 5.50% for every home sold up to $371,015, and loan amount of $364,295.
In September, 32% of builders reduced home prices, compared with 25% in August. According to the National Association of Home Builders (NAHB), that’s the largest share of builders offering price cuts since December 2022 when that share hit 35%. The average price discount was 6%.
The median sales price of newly sold homes in August was $430,300, down from July’s average of $436,700, according to the Census. But the average sales price was $514,000, slightly above July's average of $513,000.
Meanwhile, 59% of builders offered sales incentives of all forms in September as rates pushed higher — more than any month since April 2023.
Still — despite their arsenal of perks — homebuilders are feeling more pessimistic about the market.
This month, more homebuilders considered housing conditions as poor versus good, according to the NAHB/Wells Fargo Housing Market Index, with confidence retreating for the second straight month in September.
The index measuring current sales conditions fell to 51 in September from 57 the month before, while the sales expectations for the next six months declined 6 points to 49 in September. And the gauge measuring traffic of prospective buyers dropped five points to 30.
"High mortgage rates are clearly taking a toll on builder confidence and consumer demand, as a growing number of buyers are electing to defer a home purchase until long-term rates move lower," NAHB chief economist Robert Dietz said in a statement.
Gabriella Cruz-Martinez is a personal finance reporter at Yahoo Finance. Follow her on Twitter @__gabriellacruz.