Half of home sales sit just under the $400,000 price.
January 27, 2025
Sales of newly built homes soared past expectations in December, rising 3.6% to 698,000 units. This is the fastest pace of sales since September when mortgage rates were about one percentage point lower. The Northeast and the West led the gains. New home sales are captured at the contract signing and reflect more real-time housing market activity.
Builders have been responsive to changing market conditions, offering mortgage rate buydowns and pivoting to smaller construction to get reluctant buyers in the door. The larger builders have seen the greatest success, while smaller builders carry the highest levels of unsold inventory. Overall inventory of new homes available for sale ticked down slightly to just under nine months’ supply at the current sales pace; the largest builders’ supplies are about half that. Expect consolidations in this sector.
The median sales price edged up in December as more high-end homes were sold. However, 48% of homes sold were priced under $400,000, close to the 50% share last month. This is good news for potential first-time buyers to overcome escalating borrowing, maintenance, insurance and tax costs. The average first-time buyer is 38 years old, the oldest on record since tracking began in the 1980s. Unfortunately, those facing the highest affordability challenges are interested in living in higher cost markets, where inventories are the tightest.
Separately, existing home sales, which are recorded at the contract closing and reflect activity from a few months prior, rose 2.2% to 4.2 million units, the strongest pace in ten months. All regions except the Midwest saw stronger sales. Total home sales at the end of the year came in at a disappointing 4.1 million, the lowest in 30 years. A lack of housing remains the top concern, as only 1.2 million units were available for sale in December, far below the three million needed to meet current demand.
Mortgage rates bottomed out in mid-September and have had a rocky few months since then. The average 30-year fixed mortgage rate hit 7% in mid-January, a threshold that significantly stalls demand. Mortgage rates have risen in the face of the Federal Reserve’s rate cutting regime because they closely follow the 10-year Treasury bond yield, which has risen to the highest level since 2007 in recent months. Concerns about government spending, higher inflation expectations from market participants and fewer Fed rate cuts in the forecast are all reasons for the climb. The silver lining is that mortgage rates have ticked down slightly since the 7% peak. All-cash buyers remain around 28% of all transactions in December.
Residential investment will remain a drag on growth in the first half of this year.
Yelena Maleyev
KPMG Senior Economist
The market for newly built homes is challenged with a construction speed limit of one million homes per year, even during the low-interest rate environment of 2020 and 2021. Add in immigration and the aging of millennials into their prime home buying years, and we are not expecting to see a balanced market for some time. When mortgage rates edge back down to a low 6% later this year, labor shortages and higher costs of materials and land will remain hurdles for builders. The threat of deportations and tariffs could hit the construction industry especially hard. Residential investment will remain a drag on growth in the first half of this year.
Builders tap pent-up demand for new homes
Newly built homes are becoming more affordable than resale homes, but affordability challenges remain.
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