New homes are a rare bright spot in the housing market right now. Case in point: The SPDR S&P Homebuilders ETF (XHB) is up about 10% so far this year.
High borrowing costs have dissuaded potential sellers who are locked into low mortgage rates from putting their houses on the market.
“Right now, 80% of people that have a mortgage on their house are below 5%, which is well below the 6.75% rate that's out there right now,” Rafe Jadrosich, senior homebuilders analyst at Bank of America Securities, told Yahoo Finance Live (video above). “The disincentive for people to sell their house is very high.”
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This has translated to newly built homes playing a much bigger role in housing supply today than is the norm.
"Historically new homes are about 10% to 15% of the total active listings," Jadrosich said. Right now, he said, they compose about 30%.
New home listings jumped 3.8% month over month on a seasonally adjusted basis in February — the biggest increase in six months and the highest level since September 2022, Redfin reported.
And sales of new single-family homes rose 1.5% to a 661,000 annual pace in January after a revised December pace of 651,000, according to the latest government data.
"New home demand has stayed relatively robust," Jadrosich said, noting that builders have been able to sell houses in the high-interest-rate environment by offering incentives like rate buydowns and smaller homes that are more affordable for buyers.
Meanwhile, residential construction continues to rebound as builders benefit from low inventory and mortgage rates softening. Housing starts in February rose nearly 11% above January's revised estimate and 6% annually, according to fresh Census Bureau data released Tuesday.
While it is uncertain how quickly the Federal Reserve will cut interest rates, Wall Street analysts generally expect lower borrowing costs to be a tailwind for builder stocks this year.
Bank of America anticipates that “mortgage rates settle in the low 6% range, about 6.25%. That’s with two Fed rate cuts this year,” Jadrosich said.
Meanwhile, homebuilder sentiment remains robust as buyer demand picks up.
The central bank is expected to issue its next interest rate decision on Wednesday.
Dani Romero is a reporter for Yahoo Finance. Follow her on Twitter @daniromerotv
