By Lisa Sturtevant, PhD
Chief Economist, Bright MLS
New home sales in January were up 1.5% from December and 1.8% from a year ago, according to data released by the U.S. Census Bureau. This uptick came despite wintry weather in January and reflects the still-strong demand in the market. While high mortgage rates remain a constraint, homebuilders are offering concessions to homebuyers, such as buying down rates to subsidize the mortgage payment.
The Effect of Low Inventory on New Home Sales
The new home market has been doing particularly well over the past couple of years because the inventory of existing homes for sale has been so low. Last year, new homes accounted for about 30% of the total available homes for sale in the U.S. In a typical market, new homes are about 10% of total inventory. At the end of January, there were 456,000 new homes available for sale, up 3.9% from a year ago and still accounting for just over 30% of the total active inventory on the market.
Mortgage Rates & Builder Concessions
Homebuilders (and homebuyers) were hoping to see mortgage rates fall at the beginning of 2024, but strong economic data has suggested that the Federal Reserve will be delaying interest rate cuts until later in the year, which has kept mortgage rates close to 7%. Rates will fall later this year, but the timing will depend on labor market conditions, inflation, and the Fed’s decision about when to cut rates and by how much.
In the new home market, builders have often been able to offer to buy down a buyer’s mortgage rates, subsidizing the mortgage payment and making it easier for them to get into a home. Record profits in recent years have made it possible for builders to offer these concessions.
Smaller Homes, Lower Prices
But builders are also cutting prices and building smaller homes. In January, the median price of a new home was $420,000, which was up 1.8% from December but down 2.6% compared to a year ago. New home prices have declined for five months in a row. New homes are still more expensive than existing homes, with the January median price of a new home 11% higher than the price of an existing home sold last month.
Affordability is a key factor in the market in 2024, with home prices still generally on the rise and mortgage rates remaining elevated. Homebuilders will have to react to the growing affordability concerns by continuing to offer concessions like mortgage rate buy downs, dropping prices, or building smaller homes that can be built at lower cost.
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