New Home Prices Decline, Making Them More Attractive to Buyers
Price Cuts and Mortgage-Rate Buydowns Contribute to Declining Prices
The median price of new single-family houses sold in January experienced a slight increase from December; however, it has decreased by 2.6% compared to the previous year and has also dropped by 15.3% from the peak in October 2022, as reported by the Census Bureau. With a median price of $420,700, new home prices are back to where they were in October 2021.
An analysis of the three-month moving average, which helps smooth out monthly fluctuations, shows that the median price remained essentially unchanged from the previous month. At $420,700, it is now 12.3% lower than the peak price recorded in December 2022.
Factors Not Considered in the Price Declines
It’s important to note that these price declines do not factor in mortgage-rate buydowns and other incentives. Homebuilders are now extensively using mortgage-rate buydowns to boost sales volume in a market where existing home sales have suffered due to soaring prices and mortgage rates exceeding 7%. These techniques have proven effective in lowering monthly payments for homebuyers, but they also reduce the profit margins for homebuilders. Consequently, they have remained hesitant to lower the contract price despite evident decreases in market values.
Additionally, homebuilders provide other incentives, such as free upgrades, to entice potential buyers and close deals.
Difference in Pricing Between New and Used Houses
In response to competitive pressures from homeowners, homebuilders have significantly lowered their price points. The largest homebuilder in the U.S., D.R. Horton, has highlighted the effectiveness of mortgage-rate buydowns in making monthly payments for new houses lower than the equivalent payments for resale houses.
The national median price of new single-family houses has declined at a faster and greater rate than the median price of existing single-family houses, according to the National Association of Realtors. Although it’s worth mentioning that existing home prices exhibit distinct seasonal variations with the highest prices in June and the lowest in January, the prices of new homes experience less seasonality but are highly volatile from month to month. By looking at the 6-month moving average, which smoothes out seasonal variations, we find that the median price of new houses is now only 7.1% higher than the median price of existing houses.
In fact, when mortgage-rate buydowns are factored in, it becomes evident that resale houses have become relatively less attractive at their current prices due to intense competition from new houses.
Resilience of New Home Sales
In January, new home sales reached 57,000, showing a 3.6% rise compared to the same period a year ago and only a 3% decline from January 2019. In stark contrast, sales of existing homes have plummeted by 20% since January 2019. This demonstrates that the strategy of catering to lower price points and offering mortgage-rate buydowns has enabled homebuilders to maintain sales volume despite squeezed profit margins.
Ample Supply of New Homes
The inventory for sale of new houses at all stages of construction has stabilized at a high level. As of January, there were 456,000 houses available, maintaining the same level as in November. Consequently, the inventory provides an 8.0 months’ supply at the current sales pace, indicating a more than sufficient supply of new homes.
