That’s up 8.0% month over month and 4.4% year over year, mostly offsetting the 9.0% monthly sales downshift the new home market experienced in November. November’s sales rate received an upward revision as well, bumped up to 615,000 units from the originally reported 590,000. For the full year, new home sales averaged a pace of 668,000 units, up from 641,000 units in 2022.

December’s sales handily exceeded expectations, with a Reuters poll of economists forecasting a pace of 645,000 units.

The easing of mortgage rates was a chief driver of the pick-up, though robust supply and ebbing home prices also contributed to the gain. With new homes not suffering from the inventory woes plaguing the resale market, the median new home sales price dropped by 3.0% from November and $13.8% from December 2022 to $413,200. Home builders have also continued to be proactive in offering discounts to entice buyers, helping bring median prices down further.

Interestingly, another factor that may be driving down home sales is an ongoing shift in the square footage of newly completed houses. Per Census data, the median floor space of a newly built single-family home was 2,218 square feet in the third quarter last year — marking the third consecutive quarter that the square footage of a median single-family home has shrank.

Prices have followed suit, observed Odeta Kushi, deputy chief economist at First American Financial Corp.

“The price declines may be partially the result of builder price cuts to entice buyers, but it also signals that the ‘mix’ of new homes being sold may have shifted,” she said. “The median price for a new home peaked in October 2022 at approximately $497,000. In that same month, 33% of new homes sold were priced below $400,000. … Forty-seven percent of homes sold were price below $400,000.”

Kushi, like many experts, is optimistic about the new home market’s prospects moving forward, given the fundamentals underpinning its current strength.

“The new-home market has been a bright spot in an otherwise gloomy housing market,” she said. “While the resale side will begin to enter recovery mode alongside lower mortgage rates, the new-home market will likely continue to outperform because builders can still offer incentives, while existing homeowners will still be held back by the rate lock-in effect.”

Builders are positive, too. The National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index, tracking builder confidence in the single-family home market, jumped seven points to a reading of 44 in January.

Danushka Nanayakkara-Skillington, NAHB assistant vice president for forecasting and analysis, is likewise hopeful, though she notes that the market isn’t without its headwinds.

“While moderating interest rates are a promising sign for new home sales in the year ahead, long-term issues such as a shortage of buildable lots, a lack of skilled labor and excessive regulations will continue to pose challenges for builders,” she said.

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That’s according to the latest report from the National Association of Realtors (NAR), which also noted that December sales fell 6.2% year over year. December’s annualized sales pace was a low for the current cycle and also the weakest resale rate since August 2010. Full-year figures were likewise bleak, with 4.09 million resales recorded, the lowest total since 1995.

December’s slip was unexpected given the recent slide of mortgage rates, which had decreased by more than a percentage point since October, and November’s existing home sales gain that snapped a streak of five monthly retreats. A Reuters poll of economists had predicted resales to stay level from November to December.

In one respect, the surprise backtrack served as a reminder that rates alone don’t dictate sales, especially given the ongoing paucity of listings that has kept home prices buoyant. The median price of existing homes in December was up 4.4% annually to $382,600, the sixth straight month with a yearly increase. For the entire year, the median price grew to $389,800, a record high.

Lawrence Yun, chief economist at the NAR, was optimistic about the months ahead despite December’s diminished activity.

“The latest month’s sales look to be the bottom before inevitably turning higher in the new year,” Yun said. “Mortgage rates are meaningfully lower compared to just two months ago, and more inventory is expected to appear on the market in upcoming months.”

Total housing inventory was at 1 million units at the end of December, down 11.5% from November but still up 4.2% annually. At the current sales pace, unsold inventory is at a supply of 3.2 months, down from 3.5 month over month but up from 2.9 year over year.

Yun extolled the need for further inventory stabilization as crucial for the market to achieve course-correction.

“Obviously, the recent, rapid three-year rise in home prices is unsustainable,” he said. “If price increases continue at the current pace, the country could accelerate into haves and have-nots. Creating a path towards homeownership for today’s renters is essential. It requires economic and income growth and, most importantly, a steady buildup of home construction.”

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September’s monthly increase received a downward revision too, underscoring some weakness in new home demand and suggesting that the high mortgage interest rate environment continues to hold back sales. According to Freddie Mac, mortgage rates averaged 7.62% in October — the highest monthly average since 2000.

Still, the data implies that the new home market continues to enjoy remarkable resilience as buyers continue to look to new construction to fill the void created by the dearth of resale listings. New home sales were up 17.7% annually in October. Compare that to the 14.6% year-over-year drop in existing home sales in the same month.

Builders are doing their part to nurture demand, with 62% percent of respondents in the most recent survey by the National Association of Home Builders (NAHB) providing a sales incentive in October. They’re remaining proactive to pry buyers from the sidelines, according to Ksenia Potapov, economist at First American Financial Corp.

“Builders have been able to attract buyers from the existing home market with incentives that have created affordability relative to existing homes,” Potapov said. “According to NAHB, 36% of builders reported cutting home prices in November and 60% of builders provided sales incentives of some kind.”

The pressure is on to keep churning out new product. Total new home supply is at a healthy level, with October’s inventory level of 439,000 units marking the most since January. That equates to 7.8 months of supply at the current sales rate, well above the historic average of 5.9 months. But Potapov noted that to actually provide viable relief to the ongoing home inventory crisis, more of the new home inventory needs to be comprised of ready-to-occupy deliveries.

“Builders are benefiting from the lack of resale inventory, but to relieve the supply pressure, they need to deliver homes that are completed and ready to occupy,” she said. “In November, 17% of the total new home inventory for sale was completed, down from more than 20% pre-pandemic.”

Supply at the most affordable tiers, crucial for first-time homebuyers, remains particularly limited, Potapov noted. Only 15% of new home sales in October were priced below $300,000.

The gap between prices for new and existing homes has seen notable contraction of late, with the median new home price at $409,300 in October. That’s only $13,200 more than the median existing home price in the same month. Consider that in 2019, this gulf stood at $46,900.

“Median new home prices have moved lower as new home size has decreased in 2023,” said Robert Dietz, NAHB chief economist. “Combined with sales incentives and a lack of resale inventory, demand has remained solid in 2023 and should improve in 2024 as interest rates move lower.”

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The ESR Group’s most recent forecast anticipates a likely bottoming out of home sales in early 2024, regardless of a mild recession or a soft landing. When mortgage rates ease, Fannie expects a consequent rebound in sales, although any recovery will begin in modest fashion due to the lock-in effect of current borrowers’ rates still being far lower than those being offered on the market.

The road to a pre-pandemic level of sales will likely take years, Fannie’s report said. But the bottom will likely be passed in 2024.

The government-sponsored enterprise now expects total home sales of 4.8 million units in 2023, virtually unchanged from its prior forecast. The sales projection for 2024 was amended slightly downward from 4.8 million in Fannie’s prior forecast to 4.7 million. Sales are predicted at 5.3 million in 2025 and the current forecast is the first with 2025 added to the outlook.

“Housing has been and continues to be under serious affordability pressure, resulting in recessionary-level home sales activity,” said Doug Duncan, senior vice president and chief economist at Fannie Mae. “While many current owners with low mortgage rates will likely continue to be discouraged from listing their homes, we expect mortgage rates to trend modestly downward in 2024, which should help kickstart a gradual recovery in home sales into 2025.”

On the mortgage lending side, the ESR Group now expects residential purchase volume of $1.3 trillion in 2023, down $28 billion from last month’s forecast. Next year’s originations were downwardly revised as well. Fannie now forecasts $1.4 trillion in purchase volume in 2024, down $31 billion from the prior estimate. Originations are expected to climb to $1.6 trillion in 2025.

This year’s forecast of $252 billion in refinances remains virtually unchanged from the prior estimate. The 2024 refi forecast, however, was trimmed by $28 billion compared to last month’s projection and now stands at $428 billion. The decline in the estimate was precipitated by a higher mortgage rate forecast this month, as well as the ongoing paucity in refi application activity. In 2025, refi originations are now expected to grow to $625 billion.

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California to Texas is the most popular migration route in the nation, according to census data, with more than 107,000 people moving from the Golden State to the Lone Star State in 2021. Expensive real estate for both homeowners and business owners in California is one reason for the inflow. Tech companies like Oracle and Tesla have relocated their headquarters to Texas, bringing educated workers with them.

Relative to the overall population of Texas, new arrivals are more likely to have a college degree and be young, between the ages of 20 and 29. They’re also more likely to work in STEM careers or be managers, according to data from the Federal Reserve Bank of Dallas. The massive influx of young, educated people into science, technology, engineering and math jobs sustains the state’s job market and, on average, employment is growing about twice as fast in Texas compared to the rest of the nation.

Luckily for these new arrivals — and the mortgage originators who serve them — housing is still relatively affordable in Texas. Several cities in Texas have been named among this year’s best U.S. real estate markets, including those for first-time homebuyers.

WalletHub’s annual Best Real Estate Markets report crowned McKinney, Texas, as its top market in 2023. The report uses 17 metrics to determine which markets have the best blend of housing and maintenance affordability, population and job growth, home price appreciation and more. McKinney, a suburb of the Dallas-Fort Worth metroplex, was followed by its neighbor, Frisco. Denton, Allen and Austin also made the national top 10.

A SmartAsset report with a focus on first-time buyers also ranked five Texas markets in its top 10 for 2023. Based on metrics such as affordability, available inventory, relaxed competition, demographics and growth potential, SmartAsset found Killeen (a small city situated between Austin and Dallas), to be No. 1. The city, known for its proximity to U.S. Army base Fort Cavazos, had a median home sales price of about $250,000 in May 2023, with a “reasonably young” population and about 3,000 homes on the market each month.

Texas has attracted not only domestic migrants but international movers too. While the COVID-19 pandemic slowed cross-border moves into Texas, mirroring a national decline in international moves due to border closures, foreign interest in Texas real estate has picked up.

According to Texas Realtors, international homebuyers spent more than $4 billion in Texas from April 2022 to March 2023, snapping up nearly 10,000 homes. Some 2.8% of home sales in Texas were tied to international buyers, compared to 1.8% of U.S. sales during this period. ●

Unsurprisingly, total home sales in Texas are down from last year’s pace. In July 2023, 25,870 homes were sold in the state, down 8.4% from the prior month and down 32% in a three-year period, according to the Texas A&M University Real Estate Research Center. The share of new construction sales increased significantly within the past year, going from 15.2% to more than 20%.

In July, the average home was on the market for 56 days, the same as the previous month. This marked a deviation from a yearlong trend of a consistent rise in the number of days on market. Active listings rose to 2.3% of all homes, or about 85,000 listings. Texas had 3.3 months of supply to meet July’s sales pace.

Home prices saw modest but steady gains, with new and existing home prices rising 0.2% from June to July to reach $337,700. The notable exception occurred in the Austin-Round Rock metro area, which saw a pullback of 0.5% from June to July. The capital city, however, still has the highest average prices in the state. These small dips and gains throughout the state reflect relative price stability across local markets.

What the Locals Say

Both 2020 and 2021 were really hard on people in Texas who weren’t your ideal buyer. In our local market in Austin, we went a year and a half, two years where you couldn’t do an FHA loan to buy a house. That’s because there were 25 other offers, and somebody was putting 20% down and waving the appraisal. There were a lot of first-time buyers who really wanted to get their foot into being a homeowner and creating that path to generational wealth for their family, but they literally could not.

The bright spot for me this year and in our current market is that we’ve had the opportunity to help a bunch of people who are first-time buyers, who are using downpayment assistance to get their first house, who are first in their family to be homeowners. They’re getting into houses and they’re going to wind up with a bunch of free equity in a year when these rates come down.

People want three things when they buy a house: They want to be able to get the house that they want, they want to get a good deal on it in terms of the sales price, and they also want to have a good rate. And the only way they’re going to get that is if they buy now. If they wait until the rates come down, they’re going to overpay for the house. If they buy now, they can actually shop to find the house they want and get a good deal on it. When the rates come down, they can refinance, and that gives them the trifecta. That’s really the only way to get all three of those things in our market right now.

3 Cities to Watch

McKinney

Named as the best housing market in America by WalletHub, McKinney balances affordability and good economic conditions. An affluent suburb about 30 miles north of Dallas, McKinney is home to more than 200,000 people. It was recently named the 12th-richest city in the nation, with a median household income of $100,775, low unemployment and a low poverty rate. McKinney is known for its charming downtown area that includes the preserved late 19th-century Chestnut Square Historic Village.

Georgetown

Situated about 30 miles north of Austin, Georgetown is the fastest-growing city in America for two years running. The city’s population growth rate was 14.4% for the year ending in July 2022, equating to nearly 11,000 new residents. Georgetown’s largest employer is aerospace and defense manufacturer AirBorn Inc., while tech giants Dell, eBay, PayPal, Apple and more have a local presence. In August, the median home listing price in Georgetown was $499,900, down nearly 5% year over year.

San Antonio

Home to the Alamo, the River Walk and the Tower of the Americas, San Antonio is one of the premier tourist destinations in Texas, welcoming nearly 35 million visitors in 2022. About 140,000 area residents work in tourism and hospitality, and last year’s tourist counts and total payrolls for hospitality workers exceeded pre-pandemic levels. Other major local employers include Joint Base San Antonio, USAA, Toyota and UT Health San Antonio. The city’s median list price in August was $309,500, down 3% year over year.

Sources: ARC Relocation, Austin American-Statesman, CultureMap Fort Worth, Federal Reserve Bank of Dallas, Georgetown Economic Development, Greater San Antonio Regional Economic Partnership, KSAT-TV, National Association of Realtors, Site Selection Magazine, SmartAsset, Southern Living, Texas A&M University, Texas Realtors, WalletHub

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According to figures from the U.S. Census Bureau and the U.S. Department of Housing and Urban Development, sales of new single-family homes rose to a seasonally adjusted annual rate of 759,000 units in September, up 12.3% month over month and up 33.9% year over year. The monthly surge was the largest in more than a year and September’s annualized pace was the fastest since February 2022. The August sales rate received an upward bump of 1,000 extra units as well, bringing it to 657,000.

The surge in sales smashed expectations, with economists polled by Reuters anticipating a September rate of 680,000 units.

As sales soared during the month, prices dipped, with adjustments by builders leading to the biggest yearly median home price drop since 2009. The median price for a newly built home was $418,800, falling more than 12% year over year and down 3.3% from August.

Various forms of builder proactivity appear to account for much of the price decline. For one, builders are coaxing more buyers from the sidelines with discounts and other incentives to stem the tide of worsening affordability. A recent survey from the National Association of Home Builders (NAHB) showed that 62% of builders offered incentives to buyers in October, matching a recent high set in December 2022.

Danushka Nanayakkara-Skillington, the NAHB’s assistant vice president for forecasting and analysis, noted that builders are also adapting by changing scale.

“New home sales surged in September largely due to the low existing home inventory rate, as many homeowners with attractive mortgage rates are electing to stay put rather than purchase a move-up home with a much higher interest rate,” she said. “To compensate for this high interest rate environment, more builders are building smaller homes, which has resulted in a decline in the median new home price.”

Notably, builders are also responding to the demand in new homes by putting out more supply. The inventory of new homes for sale saw a slight September bump to reach 435,000 units. Stout sales activity, however, is cutting into inventory, which stood at a supply of 6.9 months at the current rate of transactions.

One figure that bears watching is the share of new home inventory that has yet to break ground. That percentage rose to 24.1% in September, and the count of such properties grew to 105,000, reaching its highest level since 1999.

Also, despite the current resilience in the new home market, it’s worth keeping an eye on how interest rates flirting with 8% will impact activity.

“While more buyers are turning to new construction because of a lack of existing inventory, higher mortgage rates that are approaching 8% are expected to slow the market in the coming months as affordability conditions continue to worsen,” said Alicia Huey, chairman of the NAHB. “Higher interest rates not only raise the cost of housing for buyers but for builders as well because of increased costs for financing construction loans.”

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Scarce resale supply and sky-high interest rates have combined to continue the stubborn affordability crisis, holding September’s existing home sales to a seasonally adjusted annual rate of 3.96 million units. That’s the slowest pace since October 2010 and was down 2.0% month over month, marking the fourth straight monthly decline. The backtrack was broad-based, as single-family sales retreated 1.9% month over month, while condos and co-ops slowed 2.3%.

Resales continue to slump on an annual basis, with September’s figure down 15.4% year over year. Sales still managed to beat consensus expectations, as a Reuters poll of economists projected September home sales at a pace of 3.89 million units.

Existing home sales appear to be set to lag in the near-term, with the most recent data from the Mortgage Bankers Association revealing that applications for purchase mortgages have recently plummeted to their lowest level since February 1995.

“As has been the case throughout this year, limited inventory and low housing affordability continue to hamper home sales,” said NAR chief economist Lawrence Yun. “The Federal Reserve simply cannot keep raising interest rates in light of softening inflation and weakening job gains.”

The lock-in effect from high mortgage rates remains a key factor in keeping existing home supply at a noteworthy low. Total housing inventory, according to the NAR, was at 1.13 million units at the end of September. That’s up 2.7% from August, but down 8.1% from September 2022.

At the current sales pace, there is a 3.4-month supply of unsold inventory, up from 3.3 months in August and 3.2 months from September last year.

Low inventory is also putting upward pressure on home prices despite the lack of sales. The median existing home price in September was $394,200, up 2.8% year over year.

“For the third straight month, home prices are up from a year ago, confirming the pressing need for more housing supply,” said Yun.

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According to the latest numbers from the U.S. Census Bureau and the Department of Housing and Urban Development, new home sales backtracked 8.7% from July to August, the biggest monthly slide since September last year. Rising borrower costs are starting to tangibly dent demand, as higher interest rates may be shackling buyers to the sidelines; the Housing Market Index (HMI) jointly maintained by Wells Fargo and the National Association of Homebuilders (NAHB) reported drops in buyer traffic for the past two months, cutting off an upward trend that had begun last winter.

The lag in August sales also came even with home builders ramping up the incentives, like discounts and points buydowns, that have helped fuel strong new home sales throughout the spring and summer. Figures from the NAHB suggest that builders are attempting to combat the rising rate environment with a renewed focus on such incentives, which were seeing a downtick in use of late. Per the organizations September builder survey, 32% of homebuilders were cutting home prices in September, the largest share of builders doing so since December 2022. Moreover, 59% of builders provided sales incentives of all forms in September, the highest share since April.

Assertive discounting by builders is helping rein in new home prices, which came in at a median of $430,300 in August. That’s down 1.4% month over month and 2.3% year over year. The gap is also shrinking between the median sales prices of existing homes, which are seeing significant upward pressure due to a dearth of supply, and new homes, which are feeling the same pressures but are mitigated by builder incentives.

It’s worth noting that new home sales remain at a healthy level and are still up 5.8% year over year. Still, the impacts of the recent surge in rates on the new home market moving forward bears watching, bringing haziness to what had been a rosy outlook for much of the year. The new-home market’s near-term prospects are especially relevant given the increasing participation of younger buyers, many of whom are turning to new builds for their first forays into homeownership.

“Millennials continue to age into their prime home-buying years, and in a market with limited existing-home inventory, a new home at the right price is a good substitute,” said Odeta Kushi, deputy chief economist at First American Financial Corp. “Some good news in month’s report, 14% of new-home sales were priced below $300,000, an increase from 11% one year ago. Indeed, according to NAHB, 42% of new single-family home buyers were first-time buyers on a year-to-date basis in 2023. This is significantly higher than the 27% reading from a more normalized market in 2018. First-time home buyers are increasingly turning to the new-home market.”

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Despite these challenges, people should keep an optimistic outlook on market trends. Home prices have trended downward but remain stable and there has been some necessary cooling in the markets that overheated in the past few years.  

With pent-up demand and low supply, a homebuying surge could occur once rates return to the 5% range. Now is the time to equip borrowers with negotiating power before competition rises again. To do so, you need to connect with today’s buyer.

Unique opportunity

First-time homebuyers, predominantly tech-native millennials entering their 30s, can access more information than ever. They’re the first generation to have grown up with digital technology that’s revolutionized and streamlined the homebuying process.

Despite this, 92% of millennials report that inflation has held them back from homeownership. The reality is they simply don’t understand the options available to them in the current market. One way to help them get more comfortable is by leveraging the very technology with which they’re familiar.

A study from the National Association of Realtors (NAR) found that 76% of all homebuyers found their home on a mobile device. By harnessing digital tools for everything from mortgage calculators to virtual tours, you can help demystify the process to make potential buyers more comfortable and confident throughout the transaction.

Additionally, financial education is key. Seventy-five percent of adults surveyed by the National Foundation for Credit Counseling said they would benefit from asking an expert some of their financial questions. As a mortgage professional, you can help fill the gap by providing clear, accurate and reliable information on everything from the impact of credit scores on mortgage lending options to how inflation affects home prices.

Here’s the reality — the economic situation has led to a unique opportunity for buyers. As of first-quarter 2023, home prices in 95% of U.S. metro areas had dropped since their spring 2022 peak. This opens up the possibility for negotiation, which would’ve been unthinkable in the seller’s market of the past few years.

This is where seller contributions can make a difference. Mortgage professionals can help buyers understand and negotiate these contributions, including a 2-1 buydown (which has a lower interest rate for the first two years before rising to the full permanent rate in the third year) and concessions like home warranty plans or closing cost assistance. The seller can cover between 3% and 9% of closing costs, depending on the loan type or the size of the downpayment.

Most of all, mortgage originators have to help buyers overcome the fear factor. Many millennials worry about overpaying, but these fears are more of a perception than a reality. Only 36% of homebuyers surveyed by Fannie Mae in Q1 2022 tried to negotiate their mortgage rate. They’ve been gripped by fear and are missing out on opportunities. By sharing facts, offering real solutions and giving clients the confidence to negotiate, originators can ensure they aren’t passive participants while buying a home.

Creative options

Undoubtedly, the ability to offer creative lending options is a critical factor in connecting with today’s homebuyers. NAR reported that first-time buyers made up only 26% of the market in 2022, down 8 percentage points from 2021. As a lending professional, you need to be an expert in your field. This means that catering to the specific needs of this group isn’t only important for good service but also to the survival of your business.

Innovative lending programs, including downpayment assistance programs and loans explicitly designed for self-employed or gig economy workers (like bank-statement loans), can unlock homeownership for people who might otherwise struggle to get a traditional mortgage. Independent contractors make up 15% of all workers, according to a recent paper from the W.E. Upjohn Institute for Employment Research.

Cash programs are especially attractive in a competitive market, given the advantages they offer to both buyers and sellers. All-cash buyers paid up to 11% less for their homes than people who used a mortgage, according to research from the University of California at San Diego. As the study shows, cash buyers can reap substantial savings on their home purchases, but not all buyers are able to make a cash offer. This means you have to provide a broad array of options to make sure you’re meeting the diverse needs of homebuyers.

Investments in technology are also essential for adapting loan offerings to today’s buyers. About 40% of surveyed customers were willing to complete the entire lending process via self-service digital tools, but the highest levels of satisfaction were recorded when digital channels were combined with personal service, according to J.D. Power. This reaffirms that while the industry needs to use digital tools throughout the process, mortgage professionals can’t lose sight of the human touch that clients crave.

Future trends

In a mortgage environment that’s rapidly evolving, keeping up with change means not only understanding what’s happening now but anticipating future trends. While clients are increasingly comfortable with an end-to-end digital mortgage process and enjoy how technology streamlines and simplifies each step, the human touch — your ability to offer personalized guidance and reassurance — makes the difference.

Staying current also means continually expanding your knowledge. Everything from global economic trends to local zoning laws influence the real estate market. Mortgage originators need to be able to provide their clients with a well-rounded view of the market and how these factors could impact homeownership goals.

Adapting to these changes includes keeping an eye on regulatory shifts. For example, the Consumer Financial Protection Bureau has indicated a heightened focus on fair lending practices. Understanding these regulations is vital to providing valuable and compliant advice to clients.

Finally, mortgage originators must remember that today’s homebuyer is more diverse than ever. The Urban Institute forecasts that 70% of new homeowners will be Hispanic by 2040. This diversity requires understanding unique cultural needs and expectations while offering services in ways that respect and meet these needs.

No matter what happens in the coming years, the core of this work remains the same: to guide your clients through one of the most significant decisions of their lives. By embracing change — in technology, consumer attitudes, market dynamics, loan options and more — you’re not just reacting to the new mortgage landscape but helping to shape it. This adaptability and foresight will enable mortgage professionals to turn the challenges of today’s mortgage industry into the successes of tomorrow. ●

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Sales of new single-family homes grew from June to reach a seasonally adjusted annual rate of 714,000 units in July, surpassing consensus projections of 704,000. Last month’s pace is 4.4% higher than the downwardly revised June rate of 684,000 units, as well as an astounding 31.5% higher than the July 2022 pace of 543,000 homes.

July’s median sales price was $436,700, down roughly 9% annually. But July saw a 4.8% bounce in the median price compared to June, the largest month-over-month price pickup since September 2022. With a paucity of existing homes on the market and motivated buyers increasingly turning to new construction, buyers are turning less often to discounts to incentivize activity, helping to boost new home sales prices.

Low supply is boosting home prices as a whole. The median new home sales price still exceeds that of existing homes, but Odeta Kushi, deputy chief economist at First American Financial Corp., noted that the gap between the two has narrowed this year.

Kushi also mentioned that even with solid sales, builders are still grappling with input and labor challenges, pushing the prices of new homes upward. These challenges include supply issues for materials such as electrical transformers and an ongoing shortage of skilled laborers.

“Higher builder costs remain a headwind to building more entry-level homes,” Kushi said. “In July 2023, only 13% of new home sales were priced below $300,000. This is significantly lower compared to the pre-pandemic July 2019 share of 47%, but up from one year ago.”

Despite these issues, new home supply is currently at a healthy level. New single-family home inventory was at 437,000 units in July, up 4.8% year over year and representing a supply of 7.3 months at the current sales rate.  The upkeep of this inventory will be key for the continued health of the new construction market, according to Kushi.

“The outlook for new home sales is largely dependent on the amount of new homes being built and demand for new homes,” she said. “Builders continue to face supply-side headwinds and affordability challenges to building more, but single-family home construction has picked up since hitting a low in November 2022.

“With existing homeowners not selling and a market that remains undersupplied, buyers may turn to the new home market, and builders are in a unique position to do what’s necessary to move inventory and bolster sales.”

So, how long can such conditions supersede the elevated mortgage rate environment? Robert Dietz, chief economist at the National Association of Home Builders, is already projecting a slowdown in the near term.

“Despite this monthly uptick, new home sales will likely weaken in August as higher interest rates price out prospective buyers,” Dietz said. “Mortgage rates increased from 6.7% at the start of July to above 7% in August.”

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