The housing market has a big disconnect that can't last, and prices for new homes have a long way to fall, analyst says

• A disconnect between sales of new homes and mortgage demand is not sustainable, according to Pantheon Macroeconomics.
• Chief economist Ian Shepherdson said its likely reflects buyers rushing to lock in deals before mortgage rates climb higher.

A disconnect between sales of new homes and mortgage demand is not sustainable, according to Pantheon Macroeconomics chief economist Ian Shepherdson.

The warning came after the Commerce Department reported Wednesday that new home sales in September fell 10.9% from the prior month to a seasonally adjusted rate of 603,000.

In a research note, Shepherdson pointed out that August saw a sales jump and the last month's dip still leaves sales much higher than what mortgage demand implies.

"This disconnect between sales and mortgage demand likely reflects buyers rushing to lock in mortgage deals before rates spiked higher," he said, adding that the 30-year fixed rate has soared nearly 140 basis points to 7.16% since August. "This front-loading of sales cannot last, though, and the mortgage applications data point to new home sales falling to only about 350K by November."

Mortgage Bankers Association also reported Wednesday that demand fell last week to the lowest level since 1997. Meanwhile, the 30-year fixed mortgage rate surpassed 7%, hitting a 21-year high.

Shepherdson also pointed out that the supply of new homes in September expanded to 9.2 months' worth of sales in September, which historically has been associated with yearly price decline. But but the median price of a single-family home last month was up by 13.9% year over year.

Such resilience in new home prices has been driven by a lack of inventory of existing homes, but those supplies are heading up as "homeowners scramble to sell before prices plunge," he added.

"The month-to-month trend in the median new home price is still positive, just, but we expect it to turn sharply negative over the next year; prices have a long way to fall before the market reaches a sustainable equilibrium," Shepherdson said.