Last week, I spent some time documenting what I called the “great American housing bifurcation.”
It’s a simple narrative. High rates are keeping sellers, but not necessarily buyers, at bay, creating a mismatch between resale inventory and demand for existing homes. That, in turn, is herding would-be buyers into new construction, because that’s all there is for sale.
Of course, higher rates deter buyers too, but the difference is that in many cases, buyers have to buy, or at least need to buy. You don’t want to raise two kids in an apartment, for example. Lacking the opportunity set to become wealthy through other avenues, the vast majority of society builds wealth through the only asset regular people are allowed to finance with tons of leverage: Homes. And so on.
Sellers, on the other hand, don’t have to sell, or at least not in the absence of economic misfortune or some life event which makes a current residence untenable (if you’re 85, a two-story home with lots of stairs and square footage might not be ideal, for example). A lot of Americans own their homes outright and they can sell to trade up (or down), but for many others, selling would mean trading a very low mortgage rate for a much higher rate. Even if you do own outright, and even if you can get top-dollar, you’re still going to be buying into a market which is up ~30% in the space of three years.
So, there’s a dearth of resale inventory. And there’s an undeniable sense of FOMO among buyers, or at least among buyers at certain price points. Builders are stepping into the void. According to the NAHB, a third of homes listed for sale are new homes, either completed or under construction. That figure was less than 13% on average in the two decades leading up to the pandemic.
With the above in mind, it’s no surprise that new home sales in the US surprised economists for the second month in a row. April’s 683,000 annual rate was near the top-end of the range, and represented a 4.1% increase from March’s downwardly-revised 656,000 pace.
Last month’s pace was the briskest in over a year. The release came with revisions covering half a decade of data, which I find absurd, but there’s no use complaining. Sales plunged in the Northeast and surged in the South.
The pricing dynamics here are a bit ambiguous. I’ve been over this repeatedly, but builders are using a combination of incentives to lure desperate buyers staring at a lack of options for resale properties. At the same time, it’s not uncommon to see price hikes for new construction in desirable neighborhoods. Taken together, the somewhat awkward juxtaposition suggests builders are trying to find a middle ground that preserves margins while making new construction more affordable.
And yet, the median new home price dropped fairly sharply on a YoY basis in April to “just” $420,800.
The average price remained above half a million, but that’s obviously skewed by high-end properties.
I should note that the new home series (all of them) aren’t especially reliable, or if that’s not quite right, it’s fair to suggest they exhibit some volatility and therefore should be taken with a grain of salt.
That said, I’d be remiss not to note that the average price (which, again, was still above half a million) fell the second most on record excluding the GFC in April.
All caveats about the data aside, double-digit YoY price declines are exceedingly rare. The market is coming up against some very tough comps — $565,000 in June and, disconcertingly, nearly $569,000 in December. That would appear to set the stage for record YoY price declines.
In any case, I’ve already spent more time on this release than I wanted to. It’s the spring home-buying season, so the figures are probably even less reliable than usual, particularly given the to and fro in rates, but it’s hard to escape the feeling that this is unstable, notwithstanding all the “stabilization” rhetoric emanating from industry mouthpieces.
In closing, do note that for regular people, buying (i.e., the typical monthly mortgage payment) has never been a less attractive proposition than renting, at least from a short-term perspective. That means that for countless Americans, the choice is between burning money on rent (historically a bad idea) and buying into a market that’s almost guaranteed to deflate significantly, with the obligatory caveat that much depends on locale.