Price cuts and mortgage buybacks make new homes costly for homebuilders, but make them more attractive.
By Wolf Richter for WOLF STREET.
The median price of new single-family homes sold in January increased from December, but was 2.6% below the previous year and 15.3% below the peak in October 2022 (blue line). According to today's data from the Census Bureau, the average price was back to the level of October 1, 2021 at $420,700
The three-month moving average, which irons out some of the monthly ups and downs, was essentially unchanged from the previous month and at $420,700 was 12.3% below its December 2022 peak (red).
But buybacks and mortgage rate incentives are not included in the price declines. These are contract prices that do not include the high and sometimes unexpected costs of buybacks at mortgage rates that builders are now using heavily to maintain their sales volume in this market, where sales of existing homes have collapsed because prices on them have fallen 7% is too high. plus mortgage interest.
Mortgage interest buybacks lower the monthly payment – and also reduce home builders' profit margins – but do not lower the contract price of the home.
The price drops also don't include other incentives homebuilders use to close deals, such as free upgrades.
What these contract prices reflect are the lower price points that homebuilders are now aiming for with smaller homes and less expensive amenities.
Price difference between new and used houses.
Homebuilders are now competing aggressively with homeowners, and the largest homebuilders have reflected this in their earnings releases. And the price range between new and resold single-family homes has become narrower. DR Horton, the largest home builder in the US, has pointed out that with buybacks at mortgage rates, the monthly payments on a new home are lower than the monthly payments on an equivalent resale home.
The difference expressed in dollars. The national average price of new single-family homes has fallen faster and further than the national average price of existing single-family homes (via the National Association of Realtors).
However, there are some seasonal differences: the median price of existing homes has a pronounced seasonal high in June and a low in January, while the prices of new homes are significantly less seasonal but vary greatly from month to month. So we look at the 6-month moving average of new and used home prices, which smooths out some of the seasonal differences:
The percentage difference. The median price of new homes (6-month moving average) is now just 7.1% higher than the median price of existing homes (6-month moving average).
Add in mortgage buybacks and it becomes clear how relatively unattractive resale homes have become in the face of competition from new homes at their current prices.
The unusually smaller price differences also occurred in the early phases of the housing crisis, i.e. in 2005 and 2006. In the later years of the housing crisis, prices for used houses finally fell sharply and far enough to make them competitive with new houses again .
So sales of new homes have held up.
In January, 57,000 new homes were sold, not seasonally adjusted, up 3.6% year over year and only down 3% from January 2019. In comparison, existing home sales are down 20% since January 2019.
This documents the effectiveness of the strategy of offering homes at lower prices and offering buybacks at mortgage rates, even though they are cutting into homebuilders' profit margins. But their business is building homes, and they can't just try to wait out this market like many potential home sellers try.
Inventory for sale The number of new houses in all stages of construction has stabilized at a very high level. In January the number rose to 456,000 houses, the same as in November, although slightly higher than in December (not seasonally adjusted).
This inventory corresponds to 8.0 months of supply at the January sales level, which is a more than sufficient supply:
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