Median new home prices are plunging. What will homebuilders do for an encore to entice buyers?
Existing homes sales prices remain stubbornly high as measured by Case-Shiller repeat sales of the same home.
In contrast, homebuilders have passed on lumber price discounts, offer interest rate buydowns, and now build smaller homes.
Median New Home Sales Price vs Recessions
Peak-to-Trough Declines
- Great Recession: $262,600 to $204,200: 22.2 Percent Decline
- Current: $496,800 to $415,400: 16.4 Percent Decline
New Home Sales vs Median Sales Price Detail
Buyers hit a brick wall on price with a peak of $496,800 in October of 2022. Median price has fallen 16.4 percent since then.
Price declines of 10 percent or more are usually associated with recessions. We now have a recovery of sorts from -10.39 percent to -4.0 percent, but that’s primarily due to easier comparisons, not rising prices.
Mortgage News Daily Rates
Buyers hit the brick wall in price when mortgage rates approached 7.0 percent. Transactions started declining much quicker.
The transaction stall point is more apparent in existing home sales.
Existing Home Sales Percent Change
Existing-home sales data from the NAR via St. Louis Fed download.
Existing Home Sales Seasonally Adjusted
Existing home sales went into a massive set of declines starting in February of 2022. Mortgage rates had barely started ticking up.
For discussion, please see Existing Home Sales Resume Slide, Down 15 of the Last 17 Months
The Housing Bubble, as Measured by Case-Shiller, Is Expanding Again
Killer Combination
The killer combination for existing home sales transactions was a sharp increase in mortgage rates coupled with a sharp increase in asking price.
As long as we have high mortgage rates and high asking prices, sales will remain in the gutter.
People do not want to trade a 3.0 percent mortgage for a 7.0 percent mortgage.
For discussion, please see The Housing Bubble, as Measured by Case-Shiller, Is Expanding Again
What Will it Take?
This brings us back to the lead question: How Much More Will Homebuilders Have to Reduce Prices to Increase Sales?
To boost sales, builders have passed along drops in lumber prices, reduced home sizes, reduced lot sizes, and bought down mortgage rates. But the easy fruit is off the vine.
For existing home sales, current transactions reflect a combination of mortgage rates, price, and willingness of consumers to speculate on rising home prices.
For new home sales, factor in ability and willingness of homebuilders to make homes more affordable with incentives or by building smaller homes. More incentives reduces profit.
Noose Tightens on Consumer Credit, Auto Loan Rejections Hit Record High
Please note, the Noose Tightens on Consumer Credit, Auto Loan Rejections Hit Record High
Yet, the consensus opinion has changed from recession to soft landing. Does anyone hear a bell?
The problem with CS is it doesn’t take into account home improvements.
I went to see my old house in the neighborhood I grew up in. The houses now go for $1 million and up. Most houses had big additions. Many were stripped to the studs for a complete reno. Probably adds 20% to the value on average.
Mother in Law sold house in northern Minnesota for 265 thousand, 5 yrs ago worth half that, at 2% its a stretch , 7% you have lost your mind.
great analysis. that’s very insightful. i’m gonna guess existing home prices will follow the new homes as people will be forced to sell due to life changes.
not any enticing needed around here.
new homes are sold ( not under contract, etc.) after the ground is broken.
all the buyer sees is a picture/video of their “future” house.
my wife’s real estate friend sold 2 in May totally on-line.
the unconfirmed rumor is one house was bought with Bitcoin.
Prices keep going up because of the basic laws of supply and demand. Right now the supply of homes for sale, relative to the population, is very low. With all the millennials and gen Zs coming into their prime home buying years, prices will continue to rise.
Home prices in Kelowna BC are still going up and UP . Cranes for Condos are everywhere tearing down old affordable homes for High Rises. The fever pitch is going on 7 days a week for high end homes and multimillion $$$ pent houses.
link to youtu.be
Meanwhile shoppers walk by the homeless sidewalks tent cities as if they don’t exist, and occasionally throw the bumbs a dime.
link to m.youtube.com
Should prob be $10.00 now, thanks to The Federal Reserve.
Why do they need to increase sales? They are solidly in the long term average range of 6-800,000.
Wait for the moment when distressed corporate sellers have to sell. Much of the “all cash buyers” were just using borrowed cash at variable rates. Many large funds were set up to buy real estate in the last few years when investors were looking for places to put their cash since bonds paid nothing and the market sucked. Now investors can get quasi risk-free government bonds that give a return unheard of in their lifetimes so they have much less reason to risk their money in real estate, commercial or residential. When commercial breaks it pulls down residential as well.
C/S is defective. // In 3 quarters, since Oct 2022, at peak season, new home sales fell
16.4%. Y/Y in real terms might be down around 25%. Home builders escaped the RE roach motel, before its too late. They preempted, because the regional banks constrict
lending. The regional banks crisis phase II might be near.
Prof Michael Raynor : prepare 4 possible scenarios for SPX, in the next year and a half, on one pc of paper.
Hi Micheal.
What is your recommendation on basements?
I’m for them because they make for great man caves.
I live in the NE metro detroit area and get Zillow updates daily. Not looking for a new house, just nosy. Although anecdotal, I have not seen any price weakness in new builds. Some existing home have price drops b/c they usually have unrealistic asking prices. Desirable existing homes are still going over asking.
Prices are going to have to come down to pre-COVID levels. Comparing homes in price per square foot will normalize different size homes.
No. More people, Less homes being built. Prices won’t go back to pre-CV levels. Inflation and simple math and population growth means that prices will continue to rise, unless Builders magically build way too many homes.
In my area, another thing I’ve noticed is builders are building homes without basements. Yet another way for them to cut costs and charge a similar price.
From the recent earnings calls from the builders, my sense is that they’re projecting that tight supplies are a long-term issue. That’s the theme.
Regardless, now that there in uptrends I’m going to let the technicals decide for me to sell some more or to completely sell me all the way out…or even whether to add some back on.
Basements have long been the cheapest square footage available.
I am following as a 40 year experienced broker and appraiser.
Yeah, I’m just saying it’s another way the builders can cut corners so to speak. Every home big or small in this area was built with a basement until the last 5 years or so. It’s not the norm anymore.
Cold weather states have frost lines of 60 or more inches. Basements are cheap additional square footage if your foundation has to be deep anyways to prevent frost heaving.
Basements also make great fallout shelters.
Lets not forget tornadoes either.
Sometime somewhere a wife is going to say, “I wish we got the house with the bomb shelter”
Absolutely. Usually when basements are skipped it’s because of ground issues, like huge rocks or water. Not to save on construction costs.
I had an addition built about 10 years ago. Ground floor room. The builder told me I could add a basement of the same size for an extra $10k. He had to get an excavator out, poor concrete, and get dirt hauled away anyway. Just do some more with a basement. He said the dirt haul away was free since they dump truck company sold the dirt.
Great to put your adult kids in.
Yes, that’s true.