The saga of the home builders gets more interesting by the day. After last week's surprise surge in home construction, we learned this week that builders had a blowout sales month in May, booking orders for 763,000 new homes on an annualized basis.
Those sales figures were up 10% month-over-month, and nearly 20% from where they were last year, impressive growth rates that have stoked bullish sentiment in the housing market and sent builder stocks soaring.
But what's important to remember is that recent success of builders is not a sign that the housing market is improving. Rather, it's a signal that builders are taking a bigger share of the housing market pie by capitalizing on low re-sale inventory and offering big price cuts to homebuyers.
The result is that while home builder sales are increasing, the housing market as a whole is struggling, with re-sale activity still languishing at 2008-crash levels. A situation that will continue to persist until sellers take a cue from builders and cut the price.
New Home Prices down 16% since late-2022
Data from the US Census Bureau shows that builders have been very aggressive in cutting the price over the last year, with the median sale price of new homes falling by -16% since October 2022.
The Median Sale Price of a house is down -16% since late 2022 (Source: US Census Bureau)
That's a fairly substantial drop for only an eight-month period, much larger than what occurred in the initial stages of the 2008 housing crash, when the builders were much slower to cut the price.
And ultimately, it's these price reductions which are luring homebuyers back into the market. The 763,000 in annualized builder sales in May was a hefty figure, so hefty that if one were to exclude the 2020-21 pandemic boom, it ranked as the best sales month going all the way back to 2007.
Home builder sales surged to 763,000 in May 2023 (Source: US Census Bureau)
Now a warning: the US Census Bureau comes up with these new home sale figures each month. And they are notoriously volatile and subject to revisions. So I wouldn't be surprised if in one or two months we find that the 763,000 sales figure was revised down.
But for now, it's a sign that builders are winning the 2023 housing market. At the expense of existing homeowners.
It's now cheaper to buy a New House than an Existing House
The builder price cuts, in conjunction with aggressive mortgage rate buydowns, now means that it's cheaper for a homebuyer to purchase a new house in 2023 compared to an existing house.
To see how this works, let's break out the numbers. The median sale price of a new house registered $416k in May 2023, which was still 5% higher than the $396k for an existing home. However, the gap has closed considerably in recent months.
New houses are now almost as cheap as existing houses (Source: NAR / US Census Bureau)
Those lower home prices for new builders are now being combined with mortgage rate buydowns to make the new homes even cheaper. For instance, DR Horton, America's largest builder, is offering homebuyers discounted mortgage rates as low as 5.50% when the prevailing market mortgage rate is close to 7.0%.
In many cases, these mortgage rate buydowns are full-term. Meaning they last for the entirety of the 30-year mortgage rather than just being for the first two years. The result is that despite new homes costing slightly more than existing homes, the monthly payment for buyers able to secure a buydown can be as much as 10% cheaper.
On top of that, buyers of new homes typically get a one-year workmanship warranty and have lower odds of needing to fund repairs in the first several years of ownership. Not to mention there is actually new home inventory available and buyers don't have to trip over themselves competing in multiple offer situations.
Posted by:
Nick Gerli
June 29, 2023
