New home sales hold up in a volatile and difficult market

Article Summary

High mortgage rates and lingering economic uncertainty kept many prospective buyers on the sidelines in September, according to National Association of Home Builders assistant vice president for Forecasting and Analysis Danushka Nanayakkara-Skillington. She said new-home sales fell from the prior month, remained below year-earlier levels, and continued to lag on a year-to-date basis. Even as builders have cut prices and added incentives to draw buyers in, elevated borrowing costs and affordability pressures are still holding back sales.

New-home prices have also come under pressure as builders use discounts, incentives and mortgage-rate buydowns to make monthly payments more manageable. The average new home sold for $400,400, up from July and August, but 3.9% below the $416,800 average from a year earlier.

As concessions, product mix changes and cost-saving design adjustments continue, a larger share of new homes is now falling below major price points than a year ago. In September, 51% sold for under $400,000, compared with 46% in the prior-year period, while 70% sold for less than $500,000, up from 66% a year earlier.

One in five new homes now has a listed price below $300,000.

Calculated Risk analyst and author Bill McBride said that figure is up from a low of 9.3% in July 2022, but still well below about 80% in 2002.

Odeta Kushi, deputy chief economist at First American, said builders are also responding by constructing smaller and more affordable homes to better appeal to payment-sensitive buyers.

“Builders are meeting buyers’ budgets with price cuts, financing incentives and smaller, more affordable homes. That is helping sustain sales, but it also shows how hard builders are working to keep buyers engaged,” Kushi said.

One encouraging sign for builders is that finished inventory has been falling steadily, reaching its lowest point of the year in September. New homes for sale declined to 476,000, which nudged months’ supply down to 8.4 months. That is still well above the five to six months that many economists view as a balanced market.

The number of completed homes for sale also slipped from 128,000 in January to 111,000 in the latest month as builders try to match supply more closely with demand, especially in the South, which still accounts for most new-home sales. Housing starts were down 7.4% year over year, adding to that trend.

This kind of reduction is a sign of difficult progress, since homes generally lose value and require deeper incentives the longer they remain unsold.

Sales conditions worsen

The typical 30-year mortgage rate is now above 7.0%, and moving from 6.0% to 7.0% on a $300,000 mortgage can add about $200 to a monthly payment. Combined with weak consumer confidence and rising inflation, the sales backdrop remains bleak.

Homebuilders say no buyer group is completely immune to those pressures. Even active adults and established move-up buyers with substantial equity have been slower to commit, forcing builders to work harder across every price segment to close sales.

Entry-level buyers are the most affected. Lennar, which has an average selling price of about $370,000, said that roughly half of the visitors who toured its communities over the summer did not qualify for a mortgage, highlighting the affordability strain facing first-time and budget-conscious buyers.

During a third-quarter earnings call, PulteGroup CEO Ryan Marshall said sales conditions were difficult for most of the year and became worse in September.

He said the sharp rise in interest rates, along with inflation, global tensions and weakening confidence, led more consumers to pause their home search. Those conditions, Marshall added, have continued in the opening weeks of October.

Marshall also said most of the absent shoppers were first-time buyers, while active adults remained much more resilient.

M/I Homes CEO Robert Schottenstein echoed that view on an earnings call, saying that higher rates, elevated gas prices, inflation and the conflict in Iran have all weighed on consumer confidence.

“The current choppy and challenging conditions may continue for some time,” Schottenstein said.