Homebuyers are finding used homes scarce, so they are turning to builders, who have also stepped up efforts to build more homes.

Data released by the U.S. Commerce Department on Wednesday showed that U.S. new home sales rose at an annual rate of 714,000 units in July, up 4.4 per cent from a year earlier, compared with a revised 684,000 units in the previous month.

The figure, which is seasonally adjusted, refers to how many homes would have been built over the year if builders had continued to build homes at the same rate each month.

July's sales pace remains the highest since February 2022.

The increase exceeded Wall Street's expectations. Economists had forecast new home sales to total 703,000 in July.

The growth in new home sales was driven by a sharp increase in the Midwest.

Over the past few months, new home sales have been trending upward overall, as homebuilders are one of the few players offering inventory to homebuyers.

The data for June was revised sharply. new home sales in June were revised down to 684,000 units versus the preliminary estimate of 697,000 units, a 2.5 per cent decrease.

New home sales data fluctuate widely from month to month and are often revised.

Key Details The median sales price of new homes rose to $436,700 in July from $415,400 the previous month.

The supply of new homes for sale fell 2.7% between June and July, equivalent to an eight-month supply.

Regionally, the Midwest led the nation in new home sales, up 47.4 percent. The West also saw a 21.5 per cent increase in sales. New home sales declined in the Northeast and South.

Overall, new home sales are up 31.5 per cent compared to last year.

The Big Picture: Homebuilders have so far enjoyed the benefits of low secondary inventory as it has pushed more buyers into newly constructed homes, boosting sales.

Listed homebuilders have been reporting profit growth as the housing market grapples with the imbalance between homebuyer demand and the low supply of homes. Toll Brothers, which reported third-quarter earnings on Tuesday, beat Wall Street's expectations.

But as mortgage rates have climbed since July, even builders are worried about a drop in sales as homebuyers find it harder to buy a home as borrowing costs rise. in mid-August, rates on 30-year mortgages rose to their highest level since 2000 and have stayed steady at more than 7%.

Despite incentives such as price cuts and mortgage rate reductions that builders may take, sales could still decline as homebuyers pull back. Builders are prepared for this scenario, as evidenced by their August confidence survey.

What they said.

Neil Dutta, head of economics at Renaissance Macro Research, wrote in a report: 'Given the ability of builders to lower interest rates for potential borrowers, the new homes market is the best option if you want to buy a home. One thing to keep an eye on is the extent to which rising rates may drive cancellations."

Mortgage payments as a percentage of income are still higher than they were during [the Great Financial Crisis], and mortgage applications for home purchases fell back to a 30-year low in July, Leah Fahy of Capital Economics wrote in a note.

"We don't think the Federal Reserve will start cutting rates until 2023, so average mortgage rates are likely to remain above 6% for the rest of the year. Given the affordability constraints faced by homebuyers, we expect new home sales to level off from there, stagnating at around 700,000 units on an annualised basis before rising again later in 2024," she added.