Higher Rates Sideline Home Buyers


Mortgage rates that averaged 7.06% in May per Freddie Mac, the highest monthly average since last November, put a damper on new home sales last month.Sales of newly built, single-family homes in May fell 11.3% to a 619,000 seasonally adjusted annual rate from a sharp upwardly revised reading in April, according to newly released data from the U.S. Department of Housing and Urban Development and the U.S. Census Bureau. The pace of new home sales in May is down 16.5% from a year earlier and is the lowest pace since November 2023. Persistently high mortgage rates in May kept many prospective buyers on the sidelines. However, significant unmet demand exists, and we expect mortgage rates to moderate in the coming months, which will bring more buyers into the market. New single-family home inventory in May increased 1.5% in May to a level of 481,000, up 12.9% compared to a year earlier. This represents an 9.3 months’ supply at the current building pace. However, due to a lack of resale homes for sale, the combined inventory for new and existing single-family homes remains lean at a 4.4 months’ supply, according to NAHB estimates. Total months’ supply was 4.1 in April and 3.6 in May 2023. A new home sale occurs when a sales contract is signed, or a deposit is accepted. The home can be in any stage of construction: not yet started, under construction or completed. In addition to adjusting for seasonal effects, the May reading of 619,000 units is the number of homes that would sell if this pace continued for the next 12 months.Due to declines in new home size and some builder use of incentives, the median new home price fell to $417,400, down almost 1% from a year ago. Regionally, on a year-to-date basis, new home sales are up 6.0% in the Northeast, 25.2% in the Midwest and 6.3% in the West. New home sales are down 7.6% in the South. Discover more from Eye On Housing Subscribe to get the latest posts to your email.

Higher Rates Sideline Home Buyers2024-06-26T11:14:58-05:00

NAHB Builders Report 22% All-Cash Sales in 2024


Up to this point in 2024, the median builder has sold 22% of its homes to buyers who used all cash to pay for them (i.e., did not take out a mortgage), according to a recent NAHB survey. The survey took the form of a special question appended to the instrument used to collect data for the May NAHB/Wells Fargo Housing Market Index. The percentage of all-cash sales is interesting, in part because it may indicate the availability of mortgage credit. Recently, the percentage has fluctuated directly with interest rates—especially the Federal Reserve’s target federal funds rate. This was discussed in detail in an earlier post on the Census Bureau’s quarterly “New Houses Sold by Price and Financing” release. Briefly, the Census release shows the share of all-cash sales increasing substantially since the Fed began tightening in 2022, reaching a peak of 10.7% in the fourth quarter of 2023 before declining to 6.6% in early 2024. This is obviously a much lower share of all-cash sales than the 22% median reported in the May 2024 NAHB survey. Before simply concluding that the two surveys contradict each other, we should consider possible explanations. The quarterly Census report is based on a sample of new homes. The NAHB survey is based on a sample of builders, many of whom tend to be small (see, for example, the recent article on Who Are NAHB’s Builder Members?). Larger builders, by definition, build a disproportionate number of the new homes; so, if larger builders tend to have smaller shares of all-cash sales, the different sampling frames could explain the apparent discrepancy between the Census and NAHB percentages. This is not the case, however. In fact, in the NAHB survey, it is the smallest builders who show the lowest share of all-cash sales. There is another possibility, if we get into the Census Bureau’s definitional weeds. The quarterly Census report is based on new homes sold, meaning that a potential buyer has either signed a sales contract or made a downpayment on the home. But this does not cover all new single-family homes. The Census Bureau classifies others as contractor-built or owner-built. On a contractor-built home, the ultimate homeowner hires a general contractor (i.e., builder) to build an individual home on the owner’s lot. This usually involves a contract to build, but that is not technically the same thing as a sales contract according to Census definitions. On an owner-built home, the owner functions as the general contractor. In addition to the quarterly report on houses sold, the Census Bureau produces an annual file from the same underlying data that can be tabulated for all types of new single-family homes. NAHB recently tabulated the 2023 file, and it shows that contractor-built (and owner-built) homes are much more likely than homes built for sale to be financed with all cash. In NAHB’s latest census of its members, 54% of single-family builders listed their primary operation as single-family custom building, which roughly corresponds to building contractor-built homes under the Census Bureau’s classification scheme. To summarize, NAHB’s May 2024 survey shows a median of 22% all-cash sales, considerably higher than the recent peak of 10.7% reported by the Census Bureau in its quarterly release on new houses sold. The discrepancy does not seem attributable to the differences between a survey of houses and a survey of builders but may be largely due to the presence of custom builders in the NAHB survey. These are builders who specialize in contractor-built homes, which are demonstrably more likely to be financed entirely with cash but are excluded from the reports on new houses sold. The NAHB survey results are therefore useful for timely information on new home financing that includes custom home building. Discover more from Eye On Housing Subscribe to get the latest posts to your email.

NAHB Builders Report 22% All-Cash Sales in 20242024-06-14T11:14:19-05:00

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