– Existing homebuyers have been dealing with high mortgage rates
– Builders are offering lower rates and incentives to attract buyers
– New home sales data has exceeded expectations
– Sales have been slowly rising over time, but not at the level of the housing bubble years
– The supply of new homes for sale is at a level that is considered good for builders
– Single-family housing permits have been increasing, offsetting weakness in multifamily housing
– Builders are making deals and offering incentives to move homes
– There is a limited supply of new homes ready for sale
– Builders’ profit margins are still higher than in the previous decade
– The gap between purchase application data and new home sales is noticeable
– Builders are taking advantage of lower rates to attract buyers.
While existing homebuyers have been battling high mortgage rates for months — which are now at 8% — the builders are wooing buyers with lower rates and incentives. Today, the new home sales data beat expectations and surprised people. However, sales have been rising slowly for some time.
Using a low bar of sales from last year, the builder’s incentives have created more sales growth and their significant advantage is that they’re offering lower rates to move homes. Imagine what the existing home sales market would look like if mortgage rates were below 6%. We certainly wouldn’t be trending below 4 million existing home sale today if that was the case.
From Census: New Home Sales: Sales of new single‐family houses in September 2023 were at a seasonally adjusted annual rate of 759,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 12.3 percent (±16.6 percent)* above the revised August rate of 676,000 and 33.9 percent (±22.9 percent) above the September 2022 estimate of 567,000..
As you can see in the chart below, new home sales are slowly growing, There’s nothing gangbusters here, but new home sales have been slowly moving higher for some time. This is very different from the housing bubble years, where sales were booming like crazy and got close to 1.4 million. Currently, the seasonal adjusted annual rate of sales is just 759,000.
From Census: For Sale Inventory and Months’ Supply The seasonally adjusted estimate of new houses for sale at the end of September was 435,000. This represents a supply of 6.9 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.
We have been able to build more single-family housing, and single-family permits have been slowly rising, which offsets the multifamily weakness that should be here for some time now, as we can see in the chart below. The monthly supply of new homes is falling from the recent peak but needs more work to return to pre-COVID-19 levels.
One of the things I like to do is break down the monthly supply data into subcategories. We have a lot of homes in the pipeline that still need to get built; this is why the builders are making deals. As we see in the monthly supply data, they had a spike last year and are forced to create incentives to move homes. Here’s how the supply breaks down:
- 1.4 months of the supply are homes completed and ready for sale — about 75,000 homes.
- 4.0 months of the supply are homes that are still under construction — about 255,000 homes
- 1.7 months of the supply are homes that haven’t been started yet — about 105,000 homes
75,000 new homes ready for sale
One of the data lines that very few people know about, but is critical to the inventory story in the U.S., is how many new homes are built and ready for sale! It’s not a lot now, nor has it ever been a lot. Even during the housing bubble crash years, we never got above 200,000. Most active listings’ inventory growth comes from the existing home sales market.
Keep things simple with today’s new home sales report: the builders confidence has been falling for months as rates have risen; many builders can’t pay down rates, and the ones that do are taking a hit on their profit margins.
However, the builders’ profit margins are still higher today than in the previous decade. This is the first time this century that we have seen a noticeable gap between purchase application data and new homes because, as we all know, the builders are singing: Baby, it’s cold outside…come inside for lower rates.
Property Chomp’s Take:
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So, moving on to the topic at hand, existing homebuyers have been dealing with sky-high mortgage rates for quite some time now. These rates have reached a staggering 8%, making it challenging for people to buy homes. However, builders have found a way to entice buyers by offering lower rates and incentives on new homes. And guess what? It’s actually working!
The latest data on new home sales has surprised everyone by surpassing expectations. Although sales have been steadily increasing over time, the builders’ incentives have given a significant boost to sales growth. Their secret weapon? Lower mortgage rates. Just imagine how the existing home sales market would look if rates dropped below 6%. We definitely wouldn’t be seeing existing home sales trending below 4 million as we do today.
According to the Census Bureau and the Department of Housing and Urban Development, new home sales in September 2023 reached a seasonally adjusted annual rate of 759,000. This represents a 12.3% increase from the revised August rate and a whopping 33.9% increase from the same month last year. However, it’s important to note that this growth is gradual and nowhere near the booming sales we witnessed during the housing bubble years, where sales reached close to 1.4 million. Currently, the annual rate of new home sales stands at 759,000.
Now, let’s talk about supply and demand. When it comes to builders, the state of supply plays a crucial role in their decision-making process. Here’s a simple model to understand how builders operate:
– When the supply is below 4.3 months, it’s an excellent market for builders.
– When the supply ranges from 4.4 to 6.4 months, it’s an average market for builders. They will continue constructing as long as new home sales keep growing.
– When the supply exceeds 6.5 months, builders will pause construction.
Fortunately, we’ve seen an increase in single-family housing construction, with single-family permits gradually rising. This offsets the weakness in the multifamily sector. However, there’s still work to be done to return to pre-COVID-19 levels.
Taking a closer look at the monthly supply data, we can see that there’s still a significant number of homes in the pipeline that need to be built. This is why builders are offering incentives to entice buyers. The supply breakdown is as follows:
– 1.4 months of supply consists of completed homes ready for sale, totaling about 75,000 homes.
– 4.0 months of supply consists of homes under construction, amounting to approximately 255,000 homes.
– 1.7 months of supply represents homes that haven’t even started construction yet, totaling around 105,000 homes.
Now, here’s an interesting piece of information that not many people know about. The number of new homes built and ready for sale is crucial to understanding the inventory situation in the U.S. Currently, there are only about 75,000 new homes available for sale. Even during the housing bubble crash years, this number never exceeded 200,000. The majority of active listings’ inventory growth comes from the existing home sales market.
To wrap things up, let’s talk about the builders’ confidence. As mortgage rates have been rising, builders’ confidence has been gradually declining. Many builders struggle to handle these high rates, and even those who manage to secure lower rates end up taking a hit on their profit margins. However, it’s worth noting that builders’ profit margins are still higher today than they were in the past decade.
In conclusion, there’s a lot happening in the housing market, especially when it comes to new home sales. Builders have found a way to attract buyers with lower rates and incentives, leading to steady growth in sales. However, the existing home sales market is still facing challenges due to high mortgage rates. It will be interesting to see how the market evolves in the coming months.