This time last year, new homes were in such big demand that builders simply couldn’t make them fast enough. They were reportedly overflowing with new contracts, and some even resorted to selling their few available lots via lotteries to their legions of wait-listed buyers.
However times have changed and buyer traffic has suddenly ground to a halt. Building costs have soared, interest rates are up and high inflation has killed buyer’s budgets. Demand for new homes has subsequently crashed as a result.
New-home sales in July reached their slowest pace in six years, the Department of Housing and Urban Development and the Census Bureau reported Tuesday. New single-family home purchases declined 12.6% month over month and were down nearly 30% from a year earlier.
“The disappointing sales pace mirrors an ongoing decline in builder sentiment as elevated mortgage rates and higher construction costs are pushing more consumers out of the market, particularly entry-level buyers,” says Jerry Konter, chairman of the National Association of Home Builders.
It's yet another sign of a sudden plunge in the new-home sector. Housing starts for single-family construction projects dropped 10% year over year in July; mortgage applications for new-home purchases fell 16.1% the same month; and homebuilding sentiment dipped for the eighth straight month in August. The number of buyers backing out of new-home contracts also is growing: Homebuilder cancellation rates have more than doubled since April, according to John Burns Real Estate Consulting. In July, 17.6% of builder contracts fell through, compared to 8% in April.
Homebuilding contracts tend to have longer construction timelines that can stretch six months or more. And while buyers who signed a contract earlier this year may have been banking on locking in a low mortgage rate, those rates have nearly doubled since the beginning of 2022. Last week, the 30-year fixed-rate mortgage averaged 5.13%, and the rise in borrowing costs has added hundreds of dollars to monthly mortgage payments.
Still, new-home prices continue to stretch higher despite the recent pullback in sales. The median price for a new home in July climbed nearly 6% compared to the previous month, reaching $439,400. One culprit: Building materials have jumped 35.7% since January 2020.
Inventory for newly constructed single-family homes was at a 10.9-month supply in July, up a whopping 81.7% from a year earlier. However, of 464,000 units nationwide, only 45,000 are completed and ready to occupy; the remainder is still under construction, according to government data.
Last week, Lawrence Yun, chief economist for the National Association of Realtors, signaled some optimism for the new-home market’s long-term outlook. “Homebuilders are naturally very cautious about rising unsold inventory during the construction phase,” Yun said. “But those completed homes are finding buyers within three months, which is relatively swift for the new-home market. Improving conditions within the supply chain for the delivery of items such as lumber and appliances will lessen overall uncertainty.”