Nobody’s buying newly built homes anymore.
Just a few months ago, builders were sitting on lengthy lists of homebuyers waiting to purchase new construction and holding lotteries to announce who would be allowed to go under contract. Not anymore.
Sales of newly built homes plunged in July, according to a recent report by the U.S. Census Bureau and the U.S. Department of Housing and Urban Development. The seasonally adjusted number of new homes for sale and sold dropped 12.6% compared with June, and plummeted 29.6% compared with July of last year.
The “drop in new-home sales represents a significant pullback in buyer demand, especially since slowdowns of this magnitude have historically preceded major economic recessions,” says Realtor.com® Senior Economist George Ratiu. “With the median price of a new home still near this year’s historic high and mortgage rates pushing the cost of borrowing much higher, buyers are finding they hit a financial affordability ceiling.”
As mortgage rates soared and home prices stubbornly marched ever higher, those eager hordes of buyers dried up. Many could no longer afford homeownership. Others sensing a shift in the market held off as the housing market corrected.
Just over a half-million (511,000) new homes were sold in July, with an additional 464,000 on the market.
“It’s an ongoing, significant downturn for the housing market,” says Robert Dietz, chief economist of the National Association of Home Builders. This is the lowest pace of new-home sales since the start of 2016.
“At the current prices and current mortgage rates, it has become unaffordable to buy a new home, particularly for first-time buyers,” says Dietz.
The most expensive real estate markets took the biggest hits. In the Western swath of the country, which includes pricey California, the number of sales and homes for sale dropped 50.3% year over year in July. It was down 37% in the Northeast, down 22.9% in the Midwest, and down 20.8% in the South.
The median price of new construction was $439,400. While that was up 5.9% from June and up 8.2% from July of last year, it was still below the $458,200 median price in April. The price is also about 13.5% more than the cost of an existing home (one in which residents have lived previously).
Despite the drops, Dietz says there’s no reason to panic. There were even fewer sales in the late 2000s during the worst of the Great Recession. And unlike back then, when there were more homes for sale than buyers, the opposite is true today. Right now, the nation is short about a million homes, according to NAHB.
Instead, Dietz expects prices will eventually fall to attract buyers. About a fifth of builders are using price incentives to lure buyers back with average price reductions of about 5%, according to a NAHB survey of builders. Incentives can be anything from builders buying down a buyer’s mortgage rate for a set period, to throwing in high-end finishes and materials, to reducing premiums for corner lots and views.
“Housing, because it’s interest rate–sensitive, tends to experience a recession before the rest of the economy,” says Dietz. That doesn’t mean the sky is falling, though, and prices will spiral down.
“We’ve got to remember this is not 2008,” says Dietz. For those previously priced out of new construction, “there’s an opportunity, in some cases, for buyers.”
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