New home sales rose to a 17-month high in July

By Anna Bahney, CNN

Washington, DC (CNN) — New home sales rose in July from the month before, beating estimates and reaching a 17-month high, as buyers continue to look to new construction as an option in the face of a historically low supply of existing homes.

Sales of newly constructed homes were up 4.4% in July to a seasonally adjusted annual rate of 714,000 from a downwardly revised rate of 684,000 in June, according to a joint report from the US Department of Housing and Urban Development and the Census Bureau. Sales were up 31.5% from a year ago.

While the new construction market is being boosted by exceptionally low inventory, affordability concerns remain. Homeowners with mortgage rates of 3% or 4% are reluctant to sell and buy another home at a much higher rate. Last week, rates topped 7% and are not expected to cool off in the near future.

While new home sales have been trending higher over the past year, sales of existing homes have been down for the past few months.

Even with higher mortgage rates and still elevated prices, new home sales have less competition from resales allowing them to sell better due to the scarcity of available housing, said Kelly Mangold of RCLCO Real Estate Consulting. “Household formation continues to outpace new construction which has continued to bolster the market despite the multitude of headwinds.”

Sales of new homes in July varied by region as markets in different areas of the US deal with local price and inventory fluctuations. Sales in the Midwest surged 47.4% from a month ago and sales in the West were up 21.5% from June. Meanwhile, sales in the Northeast declined by 2.9% from last month and dropped by 6.3% in the South.

While prices of existing home sales are beginning to rise again, with the price for a single family home at $412,300 in July, up 1.6% from a year ago according to the National Association of Realtors, the median price of new homes sold in July was down 8.6% to $436,700 from $478,200 a year ago.

“With the median price of a new home running close to that of an existing home, many homebuyers are opting for the benefits of fresh floor plans, better energy efficiency and a warranty,” said George Ratiu, chief economist at Keeping Current Matters, a real estate market insights company. “Builders are bringing a growing number of new single-family homes to market, focused on meeting the needs of an affordability-constrained consumer.”

New home sales benefit from inventory crunch

There were 437,000 new homes left to sell at the end of July, corresponding to about 7.3 months of supply at the current sales rate, according to the Census Bureau report. And while that is less than half of the available inventory of existing homes on the market in July – there were about 1.1 million – new home inventory has been inching up over the past few months. Inventory of new homes still remains 4.8% below last year’s level.

“Builders are benefitting from the lack of resale inventory,” said Odeta Kushi, deputy chief economist at First American, a financial services company which provides title insurance and settlement services to the real estate industry. “Existing homeowners don’t have to sell, and by not selling, they continue to gain the utility of shelter. But a builder will do what’s necessary to sell their inventory, including offer incentives.”

Those incentives, she said, can come in the form of mortgage rate buy-downs, paying points for buyers and offering price reductions. “They can also offer upgrades on appliances and other interior quality features.”

New home inventory as a share of total home inventory in July reached nearly 31%, which is a much larger share than it has been historically, said Kushi.

“From 2000 until the pandemic, new homes on average made up about 11% of total inventory,” she said. “When existing homes are hard to find, new homes at the right price are a good substitute.”

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