New home sales hit speed bump

September 26, 2023

Sales of newly built homes cratered 8.7% in August after being revised slightly higher in July. Monthly sales activity slowed in all regions except the Northeast, but sales were still up at a double-digit pace from a year ago in all regions except the South. Sales are captured at the contract signing, which reflect more recent activity. Builders have been making up for short supply in the resale market, but headwinds due to rising mortgage rates mount.

Sales of homes currently under construction and those that have been completed fell during the month while sales of homes that have not started construction popped 11.8%. Extreme heat and drought conditions in many parts of the country put a strain on building activity during the month.

Sales are now at the lowest level since March of this year when mortgage rates spiked before falling for a few weeks. Rates have now been above 7% for six weeks, according to Freddie Mac. In this same time frame, mortgage applications to purchase a home sunk to their lowest levels since 1995. Mortgage rates could remain above 7% into the end of the year, eating into builder margins for those who have been offering mortgage rate buydowns to lure buyers. More than half of builders offered some type of concession to buyers in September, according to the National Association of Home Builders.

Existing home sales, which reflect transactions in the resale market that are captured at the closing of the contract, fell 0.7% in August. Sales reflect activity that occurred a few months ago when mortgage rates were still below the 7% threshold. Affordability has been eroded even further since then, with the median sales price rising 3.9% from a year ago to a level of $407,100. With the median sales price of a newly built home at $430,000, many would-be homebuyers are priced out of both the resale and the newly built market.

A lack of supply is keeping a floor under prices, with the number of resale homes available for sale in August slipping to 1.1 million. Of those, single-family detached homes have been below a million units since November of last year. One estimate by the National Association of Realtors posits that a doubling of inventory is needed to help moderate prices. On the newly built side, homes available for sale sit at a level of 436,000. This means newly built inventory is almost a third of all homes on the market. Prior to the pandemic and since the 1980s, that ratio has been about 13%.