Comments from Fannie Mae, First American, MBA, NAHB, and other housing experts
New home sales hit a record high in May thanks to a surge in housing starts, the Census Bureau reported Tuesday.
Sales of new single-family homes jumped 12.2% last month to an annualized rate of 763,000 – the highest level since February 2022.
Holden Lewis, home and mortgage expert at NerdWallet, laid out a few reasons behind the steady rise in new home sales in the past year.
“First, builders are working through a glut of completed and empty new homes because kinks in the supply chain have been straightened out. The surge in completed homes means builders are pricing them to sell: In May, 48% of new homes sold for less than $400,000; a year earlier, it was 39%. And the market is topsy-turvy: More new single-family homes were for sale than existing single-family homes, which is the opposite of a typical market.”
Fannie Mae chief economist Doug Duncan, meanwhile, noted: “The prior increases in active existing home listings at the start of the year have since reversed over the spring homebuying season, leaving few options for would-be purchasers. The ‘lock-in effect,’ in which existing owners are disincentivized to list their homes due to not wanting to give up a mortgage rate much lower than current market rates, continues to suppress the number of listings. Therefore, homebuyers have increasingly turned toward new homes, which is consistent with the recent firming in home price growth and homebuilder optimism over the past few months.”
Sales price and supply
First American economist Ksenia Potapov commented that the boost in new home sales in May was driven by sales of homes not yet started, which skyrocketed 79% month over month. The seasonally adjusted estimate of the supply of new homes for sale at the end of May was 428,000, down modestly from the previous month. This represents a supply of 6.7 months at the current sales pace.
“New-home sales, along with new-home construction, have accelerated in recent months despite high mortgage rates,” Potapov said. “While existing-home inventory, which has historically made up approximately 90% of total home inventory, is severely restricted, new homes offer an attractive alternative.
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“Higher builder costs remain a headwind to building more entry-level homes. In May 2023, only 17% of new-home sales were priced below $300,000, which is up from 9% one year ago, but remains well below the pre-pandemic level of 37% in Feb. 2020.”
While homebuilders continue to grapple with elevated construction costs, Alicia Huey, chairman of the National Association of Home Builders (NAHB), said the big gain in home sales in the $200,000 to $300,000 range was an encouraging sign.
The median sales of new houses sold in May were $416,300, down 7.6% year over year but up 3.5% from the previous month. The average sales price was $487,300.
Tread with caution
Potapov that “there is still reason to temper optimism with caution, especially with the Federal Reserve suggesting that it may raise interest rates further later this year, but the housing market is starved for supply and new homes are crucial for meeting home buyer demand.”
Kelly Mangold of RCLCO Real Estate Consulting agreed that this bodes well for the for-sale market as a whole.
“Builder sentiment continues to improve as the number of new homes under construction has increased going into spring and summer homebuying season,” Mangold said. “Buyer demand remains elevated, and as buyers have begun to prepare for higher payments and adjust expectations, and we are seeing that the market has continued to shift to meet this demand.”
“Given these reports, we will likely be revising upward our new home sales, and housing starts forecasts for the remainder of the year,” Duncan concluded.
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