XLRE - Prices Of New Houses Drop Below Prices Of 'Used' Houses For First Time Since 2005. Sales Languish Inventories Sky-High

2023-07-27 02:35:00 ET

Summary

• Builders have to build and sell homes, no matter what the market conditions. More price cuts may be needed to get this moving.
• The median price of new single-family houses sold in June dipped to $415,400, down by 16% from the peak in October 2022, and down 5% year-over-year, according to data from the Census Bureau.
• The seasonally adjusted annual rate of sales of new single-family houses fell in June to 697,000 houses, but was up by 24% from June 2022, which had been, along with July 2022, a multi-year low.

Builders have to build and sell homes, no matter what the market conditions. More price cuts may be needed to get this moving.

Cut the price, and they will come. Maybe. Homebuilders have been cutting prices, they’ve been building at lower price points, they’ve been buying down mortgage rates, and they’ve been throwing incentives into the mix, as their costs have come down from the spike in 2021 and 2022, and as the supply-chain chaos has largely faded and endless delays have ended.

They’re doing this because the 7% mortgage rates have slashed demand at sky-high prices. And builders have to build and sell homes, no matter what the market conditions.

The median price of new single-family houses sold in June dipped to $415,400, down by 16% from the peak in October 2022, and down 5% year-over-year (green line), according to data from the Census Bureau on Wednesday.

The three month-moving average, which irons out the monthly ups and downs and revisions of the median price, fell to $414,433, the lowest since October 2021, down by 14% from the peak in December 2022 (red line). But these prices do not include the costs to the builder of mortgage rate buydowns and other incentives.

These price cuts and lower price points pushed the median price of new houses just a hair below the median price of “used” houses – what the National Association of Realtors euphemistically calls “existing” houses, as if new houses didn’t exist. The last time this phenomenon occurred was in 2005, which tells us that the housing market is in for a reckoning .

Builders, by offering homes that now compete on price with “used” homes, amid a very limited number of buyers for both types, are elbowing in on sales by homeowners and are pulling buyers out of that market and are taking share – and sales of “existing” houses have plunged 19% year-over-year and 29% from June 2021. So something is up.

Homebuilders have to build and sell houses no matter where the market is. And in time-honored fashion, they responded with deals to address dropping demand. Homeowners haven’t figured out yet what is happening here.

The seasonally adjusted annual rate of sales of new single-family houses fell in June to 697,000 houses, but was up by 24% from June 2022, which had been, along with July 2022, a multi-year low. Compared to June 2019, the seasonally adjusted rate of sales was down 7%.

Actual sales, not seasonally adjusted and not annual rate of sales, also fell in June, to 60,000 houses, which was up by 25% from the beaten-down levels last year. But compared to June 2019, it was still down by 9%.

This chart shows the not-seasonally-adjusted actual monthly sales – so despite the price cuts, sales volume remains sluggish, which gives us an indication that more price cuts may be needed.

These are “sales orders,” not closed sales. Cancellations are not subtracted. Many of the sales orders in late 2021 and early 2022 were then cancelled in late 2022, as the new mortgage rates suddenly put those contractual prices out of reach, and buyers were unwilling or unable to stick to the deals.

Inventory for sale in all stages of construction ticked up to 432,000 houses in June, the first month-to-month increase after seven months of declines from the inventory pileup in 2022. It seems lower prices and mortgage-rate buydowns, but also the unsnarling of supply chains and reduction in lead times, delays, and shortages, worked in bringing down those inventories at least a little.

So there is more than plenty of inventory of houses in all stages of construction, amid fairly languid sales despite price cuts and incentives, which tells us that homebuilders will continue to aggressively pursue their business and offer deals, and homeowners will eventually figure it out.

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Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.

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