New home sales tap the brakes, but still going strong
Despite robust demand, prices continue to drop. It’s all about elevated interest rates, and builders’ response as affordability remains a struggle.
Key points:
- While down 5.6% vs. September, new home sales were still up 17.7% year-over-year.
- Median prices for new homes continue to fall as builders adjust to affordability challenges by constructing slightly smaller homes.
- Affordability is at its lowest level in 17 years, according to the Atlanta Federal Reserve.
New home sales slowed down in October compared to a hot September, but overall remained strong compared to a year ago because there are so few existing homes for sale.
Sales of new single-family homes were at a seasonally adjusted annual rate of 679,000 in October, down 5.6% compared to September's rate of 719,000, which was a 19-month high.
The October total was still 17.7% higher than the pace of 577,000 a year ago, according to data from the U.S. Census Bureau.
Even with the slowdown compared to September, the market remains underbuilt relative to demand and continues to attract buyers from the existing-home market, said Ksenia Potapov, an economist at First American.
"So the lesson seems to be that if you build it – and perhaps buy down the rate – buyers will buy it," Potapov said.
Despite the demand, prices for new homes continue to fall because elevated interest rates have made affordability so challenging for buyers. The median sales price for new homes sold was $409.300 in October, down 17.6% year-over-year and the seventh straight month of price declines. This is happening while the median price of existing homes continues to increase, said Lisa Sturtevant, chief economist at Bright MLS.
"New homes are still more expensive than existing homes, but the gap has narrowed in recent months with the typical new home now just 5% more expensive than the typical existing home," Sturtevant said.
How builders are responding as affordability hits a 17-year low
The Atlanta Federal Reserve's Home Ownership Affordability Monitor was at 67.1 in September, well below the affordability threshold of 100. The tool measures a median-income household's ability to manage the cost of owning a median-priced home.
The September score is the lowest level for the index in at least 17 years. The last time that affordability monitor was at 100 was May 2021.
In order to address affordability, builders are constructing slightly smaller homes, impacting the median price, said Robert Dietz, chief economist at the National Association of Home Builders. Dietz noted one-third of new home sales were in the $300,000 to $400,000 range last month; a year ago only 20% of sales were in that range.
Supply continues to increase, according to the U.S. Census. At the end of October it was at 7.8 months, up from 7.2 months in September but down year-over-year.
Across the different regions new home sales were up 9.5% in the Northeast, 5.8% in the South and 2.5% in the West. Sales were down 0.3% in the Midwest, according to Dietz.