The numbers: Sales of newly built homes in the U.S. rose in July, as home buyers continued to turn to home builders for inventory.

Home buyers are finding few listings of previously-owned homes, and are turning to builders, who have scaled up efforts to build more homes.

U.S. new home sales rose 4.4% to an annual rate of 714,000 in July, from a revised 684,000 in the prior month, the Commerce Department reported Wednesday.

The number is seasonally adjusted and refers to how many homes would be built over an entire year if builders continue at the same pace every month.

The pace of sales in July is still the highest since February 2022.

The jump exceeded expectations on Wall Street. Economists had forecast new home sales to total 703,000 in July.

The rise in new home sales was led by a sharp increase in the Midwest.

New home sales have been generally trending higher in the past few months as home builders are one of the few players offering inventory to buyers.

The data from June was revised significantly. New home sales fell to a revised 684,000 in June, compared with the initial estimate of a 2.5% drop to 697,000.

The new home sales data are volatile month-on-month and are often revised.

Key details: The median sales price of a new home sold in July rose to $436,700 from $415,400 the month prior.

The supply of new homes for sale fell 2.7% between June and July, equating to an 8-month supply.

Regionally, the Midwest led the nation in new home sales, posting an increase of 47.4%. The West also saw sales rise by 21.5%. New home sales fell in the Northeast and the South.

Overall, sales of new homes are up 31.5% compared to last year.

Big picture: Home builders have thus far enjoyed the effect of low inventory of previously-owned homes, as it pushed more buyers to newly built homes and boosted sales.

Publicly listed home builders have reported an increase in profits as the housing market grapples with an imbalance between buyer demand and low supply of homes. Toll Brothers, which reported its third-quarter earnings on Tuesday, exceeded Wall Street expectations with its results.

“Our third quarter performance reflects a market for new homes that continues to benefit from historically low levels of resale inventory, favorable long-term demographic trends, and the persistent underproduction of homes for well over a decade,” Douglas C. Yearley, Jr., chairman and chief executive officer of Toll Brothers, said in a statement.

But with mortgage rates rising since July, even builders are worried about a drop in sales as buyers find it increasingly difficult to buy a home with rising borrowing costs. In mid-August, the 30-year mortgage rate rose to the highest level since 2000, staying firmly above 7%.

Though builders will likely turn to incentives like price cuts and mortgage rate buy downs, that sales may still take a dip as buyers pull back. Builders are prepared for that to happen, as seen in their August confidence survey, when confidence waned for the first time this year.

What are they saying? “Given the ability of builders to buy rates down for prospective borrowers, if you are looking to buy, the new market is the best option,” Neil Dutta, head of economics at Renaissance Macro Research, wrote in a note. “One thing to monitor will be the extent to which higher rates might be pushing up cancellations.”

“Mortgage payments as a share of income are still higher than during the [Great Financial Crisis] and mortgage applications for purchase in July fell back down toward 30-year lows,” Leah Fahy at Capital Economics wrote in a note.

“We don’t think the Fed will start cutting interest rates until 2023, so average mortgage rates are likely to remain above 6% for the rest of this year. Given the affordability constraints facing buyers, we expect new home sales to level off from here, stalling at around 700,000 annualised before rising again later in 2024,” she added.

Market reaction: Stocks were up in early trading on Wednesday. The yield on the 10-year Treasury note was above 4.2%.

Shares of builders, including D.R. Horton, Inc., Lennar Corp, PulteGroup Inc., and Toll Brothers Inc. were up in the morning trading session.

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