To the surprise of many, new home sales jumped 5.8% to a seasonally adjusted annual rate of 640,000 in November, according to US Census Bureau and Department of Housing and Urban Development (HUD) data released Friday.

In November, new home sales were much stronger than expected; the market had expected a contraction of 4.7%. According to the data, the median sale price of new homes was $471,200, and the average sale price was $543,600.

Last month, analysts cited a combination of a decline in mortgage rates and substantial incentives from homebuilders as the driving force. Despite this, conditions are still suboptimal and the new home sales data does not incorporate all of the headwinds, including declines in permits and cancellations.

Due to high rates of cancellations, the Census Bureau and HUD also sharply revised past-three-month estimates downward. Data from John Burns Consulting shows that about 10,000 contracts have been canceled each month since July. The company’s data shows that new home sales are about 519,000 despite gross new home sales of 602,000 year-to-date.

Currently, there are 8.6 months of supply of new houses for sale based on the seasonally adjusted estimate of 461,000 new houses for sale at the end of November.

If homebuilders want to make sales, incentives must be boosted.

According to Odeta Kushi, First American Deputy Chief Economist, ongoing new home market weakness is indicated by builder sentiment and permit data. There is a need for new-home prices to continue to adjust to accommodate rising mortgage rates and economic uncertainty.

Lisa Sturtevant, the chief economist of Bright MLS, added that in the first part of 2023, homebuilders anticipate the return of home shoppers. With mortgage rates dropping, there is likely to be more traffic as spring approaches. The growing inventory of existing homes, however, will pose a greater challenge for new homebuilders.