New home sales fall sharply
New inventory builds to 9.3 months' supply.
June 26, 2024
New home sales, which are recorded at the contract signing, plummeted 11.3% in May after April sales were revised higher. Sales, at 619,000 units, are at a new, six-month low. Sales have fallen 16.5% below year-ago levels, when mortgage rates were averaging 6.4%. Mortgage rates were averaging above 7% for most of May. The “higher for longer” interest rate environment is hurting both buyers and builders. Builders have been working to meet demand by switching to smaller, more affordable homes. The median sales price in May ticked slightly lower to $417,400; nearly 50% of homes sold in the month were priced lower than $400,000. Not all regions are benefitting from an influx of newly built inventory, as zoning restrictions, land availability and high material and labor costs make it hard for builders to ramp up. The drop in sales in the month was broad-based across regions.
Inventory of newly built homes reached 481,000 units in May, which is equivalent to a 9.3 months’ supply at the current sales pace. This is the highest level since October 2022. Builders have slowed new construction to focus on completing current construction. Single-family completions have trended above one million for the past two months, which is the highest since 2008.
Buyers remain sidelined as affordability has deteriorated over the past few years. The median income needed to buy the median priced home has skyrocketed to over $100,000 in 2024 after averaging around $60,000 in 2018-2021.
Existing home sales, which are recorded at the contract closing and reflect activity a few months prior, fell 0.7% in May. It was the third consecutive monthly decline in sales, which are now 2.8% lower than a year ago. Inventory of homes ticked up slightly to 1.28 million, which is equivalent to a 3.7 months’ supply at the current sales pace. About six months of supply is considered a balanced market. The median price of a resale home hit a new record of $419,300 in May, reflecting the significant shortage of inventory.
The bulk of the activity won’t occur until 2025, when rate cuts by the Fed will act as a tailwind for the housing market.
Yelena Maleyev, KPMG Senior Economist
Bottom line
The housing market is in a fragile state, as high interest rates erode demand. Pent-up demand for homes remains strong as millennials are aging into their prime, home buying years. The concern is affordability and how long potential buyers will remain on the sidelines. Builders are pulling back; permits have dropped to a four-year low. Mortgage rates are expected to decline slightly by the end of this year, providing some room for potential buyers to enter the market. The bulk of the activity won’t occur until 2025, when rate cuts by the Federal Reserve will act as a tailwind for the housing market.
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