Are New Homes Pricing Out Too Many Buyers?

August 24, 2017

The prices of newly built homes are rapidly rising, which may have caused the plunge in new-home sales last month, CNBC reports. Sales of newly built single-family homes tumbled 9.4 percent month over month in July to a seasonally adjusted annual rate of 571,000 units, the U.S. Department of Housing and Urban Development and the U.S. Census Bureau reported Wednesday. This is the lowest reading for new-home sales since December 2016.

The median sales price of a newly built home in July surged more than 6 percent compared to a year ago. The median sales price was $313,700 for a new home, a record price for any July on record. For comparison, the median existing-home sales price was $258,300 in July, according to the National Association of REALTORS®.

The price premium for a newly built home compared to a similar existing home has more than doubled since 2011, according to data from John Burns Real Estate Consulting.

“Long term, the new home median price has been mostly 10 percent to 20 percent above the existing home median since 1990,” noted John Burns in a recent report to clients. “Since 2011, however, new home prices have been at a 35 percent to 40 percent premium over resale prices. While the exact percentages aren’t perfect due to ‘apples and oranges’ comparisons, our consultants have been confirming for years that new-home sales have been slowed by larger than usual new-home premiums.”

Buyer demand remains high in the lower end of the market, but that is where supply in the new-home market is the weakest, economists note. 

“There is still no pickup in sales for homes priced below $300,000, and this is where most of the first time households would be shopping in,” Peter Boockvar, chief market analyst at The Lindsey Group, noted following the U.S. Census Bureau’s new-home sales report release. “The housing industry needs a moderation in home price gains in order to better compete with renting where rent increases are now moderating.”

Still, the builder’s trade group says that home builders remain optimistic about rebounds in sales in the coming months. The National Association of Home Builders is also quick to note that new-home sales in July were still 9.2 percent higher than the same period last year, despite the month-over-month decrease.

“The year-to-date growth shows that new-home sales continue to trend upward at a steady pace over the longer term,” says Michael Neal, senior economist at the National Association of Home Builders. “Steady economic growth and a healthier labor market suggest that the underlying economic fundamentals remain in place for a continued recovery.”

The inventory of new homes was 276,000 in July, a 5.8-month supply at the current sales pace.

Across the country, new-home sales only posted an increase last month in the Midwest, rising 6.2 percent month over month. Meanwhile, new-home sales slipped 23.8 percent in the Northeast, 21.3 percent in the West, and by 4.1 percent in the South. 

Source: National Association of Home Builders and “Here’s Why New Home Sales Tanked,” CNBC (Aug. 23, 2017)