Home sales and prices have been on a tear for over the past year. With mortgage rates at historically low levels, many more buyers have entered the market to compete for an all-time low inventory of homes for sale. However, one indicator of the overall market may be new home sales. According to data released by the U.S. Census Bureau, sales of newly built homes dropped in June to the lowest level since the early days of the COVID-19 pandemic in April 2020.
A look at the numbers
Below are a few statistics that stood out from this report:
- The median price of a newly built home in June rose just 6% from June 2020.
- Sales of new single family homes fell to an annualized rate of 676,000, 6.6% below May’s rate of 724,000, and 19.4% below the June 2020 level of 839,000. (Analysts were expecting new home sales to increase by 3.4% in June.)
- The inventory of new homes for sale jumped from a 5.5-month supply in May to a 6.3-month supply in June. Last fall, it sat at a low of just 3.5 months.
Why the slowdown in new home sales?
There are likely several factors at play in the new home market. For starters, prices have risen at such a rapid pace that many buyers have become priced out of the market for the time being. The double digit price gains of new homes have out-gained wage growth, thus resulting in less buyers being able to enter the market. To further complicate matters, skyrocketing construction costs have made it prohibitive for home builders to build affordable housing. Thus, most new home construction has focused on the high-end market.
Other factors contributing to the challenges in the new home market are the shortages of materials, appliances, and labor. This has resulted in numerous delays for builders, thus adding to the timeline for various projects to be completed. These delays combined with rising material costs often results in even higher purchase price for newly constructed homes.
Summary
There is unquestionably still strong demand from home buyers, however much of it is being squelched by affordability and supply issues. These signs are clearly showing up at home builder sites in June and have been a factor in weakening home builder sentiment for the past two months. Another factor that is impacting the housing market is the probability of rising mortgage rates. In fact, the month of June brought about a quarter of a percentage point increase in rates. With home prices already stretching buyers, any increase in mortgage rates will lead to more buyers being priced out of the market. As a result, many economists are predicting a cool down in the housing market. This should result in price stabilization and potentially even slight corrections in some overheated markets.
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