The latest data on new and existing home sales underscore the challenges in the housing market. While inventories are increasing and sales are declining, the prices of existing homes continue to reach new highs. Potential homeowners are grappling with near-record low affordability, leading to concerns that they may never be able to purchase a home. Despite affordability being a significant hurdle, some developments suggest that control of the market is shifting from sellers to a buyers.
According to the National Association of Realtors, U.S. existing home sales dropped 5.4% in June to a seasonally adjusted annual rate of 3.89 million units, the lowest level since December. At the same time, housing inventory increased 3.1% to 1.32 million units to the highest level since October 2020. Despite the lower turnover and increase in inventory, the median home price climbed 4.1% from a year earlier to an all-time high of $426,900.
The good news for potential buyers in the existing home data is that more homes are coming to market. Supply is 23.4% higher than one year ago, and at June’s sales pace, it would take 4.1 months to work through the current inventory of existing homes. That was the highest level since May 2020 and was up from 3.1 months a year ago. Still, current inventories are still below the four-to-seven-month supply that is viewed as a healthy balance between supply and demand.
The bump in supply coincides with a shift in behavior from buyers and sellers. Buyers are turning more cautious. The Pending Home Sales Index, a forward-looking indicator based on signed contracts, fell from 72.3 to 70.8 in May, the lowest level on record.
Sellers also appear to be getting a more nervous. The slowdown in sales is causing sellers to drop listing prices. According to Redfin, active listings with price drops hit a seasonally adjusted high of 19.8% in June.
The biggest hurdle to unlocking additional supply is the level of interest rates. Homeowners who locked in mortgage rates much lower than the current average rate of 6.77% are reluctant to sell their property. Many current homeowners simply can’t afford to move because their mortgage is not transferable to a new property. The cyclical and structural supply shortage relative to demand is driving the steady climb in existing home prices.
Dynamics in the new home market are a little different. According to U.S. Department of Housing and Urban Development data and the U.S. Census Bureau, sales of newly built, single-family homes also fell in June, dropping 0.6% to a 617,000 seasonally adjusted annual rate. However, unlike existing homes, new home prices dropped as sales volumes fell. Median new house prices dipped 0.1% to $417,300 in June from a year ago and have remained flat for most of the year.
Substantially higher inventory levels of new homes are keeping prices down. In June, new single-family home inventory was 476,000 units, up 11.2% from a year earlier. This represents a 9.3 months’ supply at the current building pace, compared to 4.1 months of supply of existing homes. There were only 3.3 months of new home supply in the market in October 2020, so today’s inventory levels relative to sales is substantially higher.
Another difference between the new home and existing home market is that homebuilders typically have more pricing flexibility. They can offer valuable incentives and quickly lower prices in response to local conditions. “To address affordability, we are still using incentives such as mortgage rate buydowns, and we have reduced the prices and sizes of our homes where necessary,” said Bill Wheat, D.R. Horton Executive Vice President and Chief Financial Officer on a Q3 2024 earnings conference call.
The aggressive markdowns of new home prices have created an unusual situation in the market. New homes are typically more expensive than existing homes. However, data last month showed the median new home now sells for less than the median existing home.
But don’t feel bad for the homebuilders. Lower lumber prices and other input costs have helped them preserve profit margins and offset the cost of providing homebuyer incentives. For example, PulteGroup reported a 10% jump in revenue and records earnings per share for the second quarter while still managing to grow its gross margin by 0.3%. Builders are positioned well for this environment. They have room to respond to the current low levels of affordability and stand to benefit from the chronic housing shortage.
“While interest rate movements can impact short-term homebuying demand, long-term market dynamics continue to benefit from a structural shortage of homes caused by years of underbuilding,” said Ryan Marshall, President and Chief Executive Officer of PulteGroup in a recent press release. The U.S housing shortage was 4.5 million homes in 2022, according to an analysis from Zillow in June.
There is no quick fix to the structural home shortage that puts upward pressure on prices. Existing home inventory is growing but remains below its long-term equilibrium. However, financially healthy homebuilders pumping out relatively cheap new homes can at least help offset the lack of supply in the existing home market until mortgage rates come down. With the economy showing signs of strain and the Federal Reserve likely to start easing short-term rates later this year, some mortgage rate relief may be close. Potential homeowners just need to be patient.
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