Homebuyers again flocked to newly built homes in May after finding few options in the resale market, driving sales for builders higher as the spring season came to an end.
New home sales jumped 12.2% to a seasonally adjusted rate of 763,000 units in May from the downwardly revised April rate of 680,000, the government reported Tuesday. That was 20% above the year-ago level and well above the Bloomberg consensus expectation of 675,000 units for May.
The uptick in sales — which builders had foreshadowed in their latest earnings calls — provides yet another sign that homebuyers are turning to new homes amid few options in the previously-owned market.
“There's interest in new construction and the incentives builders are able to offer…builders, they could have 20 models sitting there empty and ready to go and they want to sell fast,” Monte Miner, real estate agent at Ironwood Fine Properties in Phoenix, said. “Mortgage rate buy-downs are a popular incentive, I've been able to get people an interest rate under 5% in new builds.”
Still, headwinds remain for construction as supply of new builds shrink, prolonging the inventory challenges that remain in the housing market.
Buyers flock to new construction
There were 428,000 new homes for sale by the end of May, down from 433,000 in April. That represents 6.7 months of supply at the current sales rate – down markedly from 7.6 months in April and 7.9 months in March.
The waning supply of new homes adds to the historically bad inventory challenges on the existing-home side – worsened by the mortgage rate trap. That has prompted builders to speed up the development of new homes to meet the demand.
Construction of new US homes increased for the second month in a row in May, according to government data released last week. Housing starts and permits for single-family homes both saw improvements month over month.
Even with that advantage, there’s still a problem of affordability.
According to the National Association of Home Builders and Wells Fargo Opportunity Index, 45.6% of new and existing homes sold between January and the end of March were affordable to families earning an income of $96,300. While this is up from 38.1% in the year-end of 2022, it was still near the lowest level since NAHB first began tracking that data a decade ago.
And that could get worse as home prices cement a recovery. US home prices grew by 0.5% in April, according to the latest S&P CoreLogic Case-Shiller report. That's the third straight month of price increases, adding pressure to affordability — even in what were once considered more affordable markets.
For instance, the Southeast again was the nation's strongest housing region, with values there growing 3.6% in April.
While the median sales price of new houses sold in May slipped to $416,300 from $420,800 the month prior, the Census Bureau found, the 1.1% month-over-month drop was much smaller than the 7.7% monthly decline registered in April.
“The heightened competition in these markets may worsen the conditions faced by buyers with financial constraints, particularly due to the already limited supply of affordable homes,” Realtor.com Economist Jiayi Xu said in a statement. “While the rise in new construction is encouraging, there is a pressing need to build homes catering to all income levels.”
Builders face headwinds
Even though new home sales increased in May, ongoing labor shortages could threaten to delay progress and keep affordability low heading into the summer.
As of June, there was a deficit of 1.5 million housing units nationwide, NAHB Chairman Alicia Huey estimated. In addition, there’s a shortage of more than 400,000 workers in the construction industry, NAHB said, which has resulted in construction delays and higher building costs.
The industry is also facing a shortage of distribution transformers, slowing down housing projects. The cost of transformers, according to NAHB, has also increased by more than 70% over the past three years.
The question is whether those headwinds will result in costlier homes for buyers down the line.
Still, “building more homes is the only way to tame inflation, satisfy unmet demand, [and] achieve a healthy supply-demand balance in the for-sale and rental markets,” Huey said.
Gabriella is a personal finance reporter at Yahoo Finance. Follow her on Twitter @__gabriellacruz.
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