- November newly built homes sales were down 14% from a year ago.
- The median price of a newly built home sold in November rose nearly 19% from November 2020, despite rising mortgage rates.
- “A hefty correction appears to be due,” wrote Ian Shepherdson, chief economist at Pantheon Macroeconomics in a note to investors.
- Still, inventory of existing homes is at historic lows, keeping prices high for now.
At some point, the price becomes too high. That may be the case for prospective purchasers of freshly constructed single-family houses. Sales of such properties fell 14 percent from a year earlier in November, considerably below expert projections. According to the US Census Bureau, October’s sales figures were reduced to the lowest level since the outbreak began.
Despite sluggish sales and increasing mortgage rates, the median price of newly constructed houses sold in November increased by over 19% from November 2020. This occurred despite an increase in the availability of new dwellings. Observers believe that growing inventories will force prices down. However, since existing housing inventory is historically low, prices for newly constructed homes continue to rise. For the time being, the issue is: how high is too high?
In a note to investors, Ian Shepherdson, chief economist at Pantheon Macroeconomics, wrote, “A hefty correction appears to be due, but the rapid increases in existing home prices — inventory in that market is only one-third the level in the new home market, relative to sales — is putting extra upward pressure on new home prices.”
According to the National Association of Realtors, prices for existing houses sold in November were up slightly over 13% year over year, a modest rise over the yearly gain in October. Existing-home prices are higher because inventory is scarce, with just a two-month supply at the present sales rate.
The median is also skewed higher due to the mix of properties for sale, which is mostly comprised of higher-priced residences. Even repeat sale price indices, such as S&P Case-Shiller, show prices up over 20% year over year. Prices for new houses are increasing not just because there are so few available on the resale market, but also because of increased construction material costs. Those expenses are being passed on to customers.
The cost of timber has risen again after peaking last spring and decreasing substantially throughout the summer. Its price has more than doubled since the US Commerce Department stated in November that import taxes on Canadian timber will be doubled in 2022.
Homebuilders have also slowed sales due to supply chain concerns, as they do not want to sell a house that they will not be able to deliver on time. Lennar, a homebuilder, recently reported poor quarterly results, citing a “continuing housing supply shortfall” caused by “limited entitled land, labor, and supply chain restrictions.”
While Realtors anticipate decreased existing house sales next year as mortgage rates rise and prices remain high, builders are more optimistic. In December, builder sentiment reached its highest point of the year (tied with February). Because the Census survey has such a large margin of error, it’s feasible that the sales figures may be altered. “We wouldn’t be shocked if both the October and November statistics were significantly revised up.
Meanwhile, Shepherdson believes that the growing trend in mortgage applications is a stronger indicator of the underlying condition of demand in the housing market. According to the Mortgage Bankers Association, mortgage applications for newly constructed homes were down only 2% in November compared to a year earlier. That’s a lot less than the real sales reduction.
If mortgage rates continue to climb, as they are predicted to, purchasers would have less buying power in 2022 and will be unable to afford the homes on the market. As a result, builders may be compelled to cut costs, or at the very least restrict how much they increase them. While a true correction may be premature at this time, historically, prices have trailed sales by around six months, and sales are declining.