When it comes to new home sales, robust pent-up demand and low resale supply continue to trump high mortgage rates.
Sales of new single-family homes grew from June to reach a seasonally adjusted annual rate of 714,000 units in July, surpassing consensus projections of 704,000. Last month’s pace is 4.4% higher than the downwardly revised June rate of 684,000 units, as well as an astounding 31.5% higher than the July 2022 pace of 543,000 homes.
July’s median sales price was $436,700, down roughly 9% annually. But July saw a 4.8% bounce in the median price compared to June, the largest month-over-month price pickup since September 2022. With a paucity of existing homes on the market and motivated buyers increasingly turning to new construction, buyers are turning less often to discounts to incentivize activity, helping to boost new home sales prices.
Low supply is boosting home prices as a whole. The median new home sales price still exceeds that of existing homes, but Odeta Kushi, deputy chief economist at First American Financial Corp., noted that the gap between the two has narrowed this year.
Kushi also mentioned that even with solid sales, builders are still grappling with input and labor challenges, pushing the prices of new homes upward. These challenges include supply issues for materials such as electrical transformers and an ongoing shortage of skilled laborers.
“Higher builder costs remain a headwind to building more entry-level homes,” Kushi said. “In July 2023, only 13% of new home sales were priced below $300,000. This is significantly lower compared to the pre-pandemic July 2019 share of 47%, but up from one year ago.”
Despite these issues, new home supply is currently at a healthy level. New single-family home inventory was at 437,000 units in July, up 4.8% year over year and representing a supply of 7.3 months at the current sales rate. The upkeep of this inventory will be key for the continued health of the new construction market, according to Kushi.
“The outlook for new home sales is largely dependent on the amount of new homes being built and demand for new homes,” she said. “Builders continue to face supply-side headwinds and affordability challenges to building more, but single-family home construction has picked up since hitting a low in November 2022.
“With existing homeowners not selling and a market that remains undersupplied, buyers may turn to the new home market, and builders are in a unique position to do what’s necessary to move inventory and bolster sales.”
So, how long can such conditions supersede the elevated mortgage rate environment? Robert Dietz, chief economist at the National Association of Home Builders, is already projecting a slowdown in the near term.
“Despite this monthly uptick, new home sales will likely weaken in August as higher interest rates price out prospective buyers,” Dietz said. “Mortgage rates increased from 6.7% at the start of July to above 7% in August.”