Builders in the South and West are undertaking much more aggressive concessions than in other regions.
New home sales, which are recorded at the contract signing, jumped 7.2% in January from December’s upwardly revised pace. Sales, on an annualized basis, are now at the highest level since March of last year, when the Federal Reserve first embarked on its rate hiking regime. Masked in the data is the number of cancellations that builders have experienced. Sales remained 19.4% lower than a year ago.
The South, the largest new build market in the country, drove the gains, with a 17.1% surge in monthly sales. All other regions’ sales fell during the month. Builders in the South and West are undertaking much more aggressive concessions and price discounts to unload unwanted inventories.
The new build market is oversupplied, especially compared to the resale market. The inventory of new homes available for sale was 7.9 months in January, slightly off the peak in Q3 in 2022 but still higher than the average of the 2010s. Builders carried just under 6 months of supply after we emerged from the subprime crisis.
High inventory levels are slowing down new home construction; single-family permits in January are at the lowest level since the aftermath of the housing bust. That means the single-family housing market will remain a drag on the overall economy in early 2023.
A majority of builders are now offering some form of price cuts, mortgage rate buydowns or other concessions to lure buyers. The median sales price in January is down 14% from the October peak but it's still up 29% from the February 2020 level. We need a lot more cooling in the housing market for single-family homes to become affordable again, especially for first-time buyers where pent-up demand is the greatest.
In January, homes sold that had not yet started construction popped 72% compared to December. That was the second highest monthly increase since 1999 (when the data began to be recorded). The highest was June of 2020, when builders resumed construction activity after initial lockdowns due to the pandemic. Homes sold that were under construction and completed both declined in January. (Homes sold before starting construction are at the greatest risk of cancellation.)
Separately, existing home sales, which are recorded at the contract closing, dipped 0.7% in January, marking the 12th consecutive month of declines. Sales were 37% below year-ago levels. Inventory remained tight with only 2.9 months’ supply, while listings sit on the market longer compared to last year.
While the new home build market sees more sales due to price cuts and mortgage buydowns, the existing home market has yet to hit bottom.
Mortgage rates dipped slightly in January but started to rebound in early February. More clarity over the Federal Reserve’s intent to continue its tightening regime drove the 10-year Treasury yield higher, which tends to lead the 30-year fixed mortgage rate. A small dip in the mortgage rate reinvigorates activity, especially for lower income buyers who are more price sensitive. Rising rates in February mean sales could be muted for the month. Applications to purchase a home fell again by mid-February after rising slightly at the start of the month.
The divergence in activity in the new versus resale home markets will continue while prices stay high and inventory gaps remain. Builders are much quicker than homeowners to cut prices in order to clear inventory. While the new home build market sees more sales due to price cuts and mortgage buydowns, the existing home market has yet to hit bottom. Potential home sellers are sitting tight, especially those who have sub-4% mortgage rates. It is more enticing to rent out one’s home than to sell at these rates.