Builders step up to unload new homes

New home sales, which are recorded at the contract signing, jumped 7.2% in January from December’s upwardly revised pace. Sales, on an annualized basis, are now at the highest level since March of last year, when the Federal Reserve first embarked on its rate hiking regime. Masked in the data is the number of cancellations that builders have experienced. Sales remained 19.4% lower than a year ago.  

The South, the largest new build market in the country, drove the gains, with a 17.1% surge in monthly sales. All other regions’ sales fell during the month. Builders in the South and West are undertaking much more aggressive concessions and price discounts to unload unwanted inventories.

The new build market is oversupplied, especially compared to the resale market. The inventory of new homes available for sale was 7.9 months in January, slightly off the peak in Q3 in 2022 but still higher than the average of the 2010s. Builders carried just under 6 months of supply after we emerged from the subprime crisis.

High inventory levels are slowing down new home construction; single-family permits in January are at the lowest level since the aftermath of the housing bust. That means the single-family housing market will remain a drag on the overall economy in early 2023. 

A majority of builders are now offering some form of price cuts, mortgage rate buydowns or other concessions to lure buyers. The median sales price in January is down 14% from the October peak but it's still up 29% from the February 2020 level. We need a lot more cooling in the housing market for single-family homes to become affordable again, especially for first-time buyers where pent-up demand is the greatest.

In January, homes sold that had not yet started construction popped 72% compared to December. That was the second highest monthly increase since 1999 (when the data began to be recorded). The highest was June of 2020, when builders resumed construction activity after initial lockdowns due to the pandemic. Homes sold that were under construction and completed both declined in January. (Homes sold before starting construction are at the greatest risk of cancellation.)

Separately, existing home sales, which are recorded at the contract closing, dipped 0.7% in January, marking the 12th consecutive month of declines. Sales were 37% below year-ago levels. Inventory remained tight with only 2.9 months’ supply, while listings sit on the market longer compared to last year.