New Home Sales May Be Stalled Because Prices Are Too High
It’s almost as though the lead in this week’s stories about stagnating new home sales was buried. Sure it’s significant that new-home sales in October came in at a lackluster annual rate of just 458,000, up less than 2 percent from last year.
But at the same time, new home prices in October rose to a record $305,000. Even though the margin of error in this survey is high, the price of a new home compares to a median price of only $208,300 for an existing home, according to the National Association of Realtors.
The gap has never been that wide. New homes have always been an upgrade in all but the most affordable markets. Now they have become a luxury item. That’s not going to help get the new-home market back on track.
Most analysts attribute the rise to a shift toward more luxury production by home builders. The Commerce Department numbers certainly bear this out. They show that the percentage of new homes selling for $750,000 or more has risen to 9 percent, twice as high as it was at this time last year.
At the same time, builders are having trouble finding qualified first-time and first-time move-up buyers, who are hampered by stagnant wage growth, college debt, and burdensome underwriting requirements.
But some of the $40,000 price increase in one year stems from low mortgage rates that allowed builders to push prices to record highs. Builders may be shooting themselves in the foot by raising prices to the point where new homes can’t even compete with existing homes, which now account for 10 times more sales.
Builders know that when mortgage rates are low — and 30-year fixed-rate mortgage dipped to about 4 percent last week — they can afford to charge more for a home. Conversely, when rates drop, as they are likely to do at some time next year, once the Fed changes monetary course, prices are likely to decline, unless the market heats up.
That may not be a good thing for people who bought into a community this year. These buyers may find that come next fall builders are lowering prices on new homes in the same community to qualify more buyers at higher mortgage interest rates. It’s no wonder that so many buyers are sitting on the fence waiting for market conditions to improve.
The Federal Reserve Board lowered interest rates in part to pump prime the housing market. The thought was that after the market got going, market forces — namely a seemingly unquenchable American desire for a better home — would take over and move the market forward. As the economy grew, creating more jobs and more demand for housing, the Fed could ease up on the rate throttle.
That was more than four years ago. New-home starts and sales are still coming in at roughly half their traditional rate. Meanwhile, the economy in the last quarter grew at nearly 4 percent. And unemployment has dropped to less than 6 percent. Low mortgage rates may be contributing to the new-home industry’s ability to get back on track.
Why do you think the new-home market has failed to recover like the rest of the economy?