Builders are taking advantage of the housing market inventory issues, which is why new home sales are growing yearly, even with higher mortgage rates. Today, the U.S. Census and Department of Housing and Urban Development reported that new home sales grew faster than anticipated as the builders who are efficient are finding ways to sell homes in this higher mortgage rate environment.
I often use the term efficient home sellers to describe the home builders in this low inventory environment. What do I mean by efficient home sellers? Builders sell their homes as a commodity, unlike existing homeowners. Because of that, builders now have excess profit margins to use post-COVID-19, and they use it to make deals to move homes. Not all the homes being sold have price cuts or rate buy-downs. However, when the builders need to move product, they will not hesitate to make these deals happen, whereas an existing homeowner might not.
New home sales
According to the recent Census report, “Sales of new single‐family houses in July 2023 were at a seasonally adjusted annual rate of 714,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 4.4% (±12.8%) above the revised June rate of 684,000 and 31.5% (±16.3%) above the July 2022 estimate of 543,000.”
As we can see in the chart below, new home sales are growing, even with the negative revisions we have seen in the report. While existing home sales are still negative year over year, new home sales are growing year over year. While new home sales market is small compared to the existing home sales market; their buyers are older and make more money.
New Home Supply
New home supply is a more complicated matter. There needs to be more clarity on how many active listings this sector can supply in the U.S. Currently, we have 75,000 new homes ready for sale. We are almost back to pre-Covid-19 levels. One thing to remember with the chart below is that even in the worst period of the biggest housing supply crash in history, the new home completed supply stayed below 200,000.
This isn’t the area to look for significant new inventory for sale, folks — it never has been. Most of the active units of supply in scale will have to come from the existing home sales market.
According to the new home sales report, “The seasonally‐adjusted estimate of new houses for sale at the end of July was 437,000. This represents a supply of 7.3 months at the current sales rate.”
Here’s my model for understanding the builders:
- When supply is 4.3 months and below, this is an excellent market for builders.
- When supply is 4.4-6.4 months, this is just an OK market for builders. They will build as long as new home sales are growing.
- When supply is over 6.5 months, the builders will pause construction.
As we can see in the chart below, we have made significant progress in bringing the supply down for the builders, which is suitable for housing permits in the future. However, we aren’t below 6.5 monthly on the three-month average yet.
Another topic that needs more clarification is analyzing the monthly supply data. Breaking down this data (7.3 months) into different categories is vital:
- 1.3 months of the supply are homes completed and ready for sale — about 75,000 homes.
- 4.3 months of the supply are homes that are still under construction — about 254,000 homes
- 1.8 months of the supply are homes that haven’t been started yet — about 108,000 homes
The homes that haven’t been started yet are at an all-time high, and the builder’s confidence has fallen a bit lately, so don’t look for a rush to build until they have a better idea of whether they can sell these homes once they’re complete.
As we can see with today’s new home sales report, it’s a different world for the builders than for existing homeowners who want to sell and move to another home.
The affordability hit for homeowners is real, so the total cost to move has taken a bit out of demand because prices and rates rose so much together. This is the biggest reason new listings data has been trending at the lowest levels ever. However, the builders, for now, have been able to manage these higher rates more efficiently.
