New-Home Sales Basically Flat in June, Trends Flat Too

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New-home sales rose a scant 1.6% in June, literally just a rounding error. As you can see in Exhibit 1, new-home sales so far this year are down slightly from the flat trend of the preceding three years, but not alarmingly so. Some analysts wonder why sales are not picking up. We wonder why they would.

Sales and Starts of New, Single-Family Homes

Exhibit 1 illustrates how new-home activity surged during Covid, as households fled the cities for the exurbs. The problem, of course, was that excess demand for homes in the burbs was matched by excess supply in the urbs. There was no surge in population—or homebuyers—to sustain the surge, and so we have been slowly pulling back to 2018 norms ever since.

Indeed, the surprise to us is that while new-home construction moved way above sustainable levels over 2020-2021, it never dropped below those levels enough to work off the excess supply of housing. The direct evidence of excess supply is that inventories of unsold new homes surged over 2021-2022, when housing starts were ramping up but new-home sales were cooling down, and those inventories have not been worked down since. Inventories of unsold new homes have been holding steady since 2022 at nine months’ worth of sales, compared to pre-Covid norms of four to six months’.

At present, new-home construction is sufficient to keep inventories steady. While inventories are elevated, builders have been content to sustain them at the current levels. One concession on the builders’ part has been pricing. New-home sales prices have been falling since early 2022, and with prices of goods and services elsewhere rising, the relative or real price of new homes has fallen substantially. As you can see in Exhibit 2, median real new-home sales prices are all the way back to pre-Covid levels. The remaining problem for affordability, of course, is that mortgage rates are dramatically higher than they were pre-2020. Builders can’t do much about that.

With inventories so high, builders are not going to raise production on their own. And with the homebuyer population growing only sluggishly and mortgage rates reducing affordability, home sales are most unlikely to suddenly surge. The most likely move from here would seem to be a pullback in construction levels to work down inventories, but builders, again, have been resistant to that. The bottom line is that the new-home market is likely going nowhere until conditions change markedly.

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