Bring on the supply of new houses! Prices drop, as homebuilders try to sell the inventory, but are still far too high.
By Wolf Richter for WOLF STREET.
Inventories of completed new single-family houses for sale in February jumped by 34% year-over-year, and by 55% from February 2019, to 121,000 houses, the highest since July 2009 during the Housing Bust, and roughly where they’d been on the way up in February 2006, according to data from the Census Bureau today.
These are “spec houses” that were built without buyers lined up. Homebuilders are motivated to sell this inventory of spec houses quickly because they’ve sunk a lot of capital into them.
From the buyers’ point of view, this is a good thing: Bring on the new supply of essentially move-in-ready houses that builders really need to sell – more choices, lower prices, and bigger incentives.
For the overall housing market, this is also a good thing. It needs this surge of new supply. It’s competition for homeowners selling or thinking about selling their homes, including their vacant homes they’d moved out of years ago but didn’t put on the market to ride up the price spike all the way.
But the publicly traded homebuilders have been singing the blues, and their shares have careened lower from their highs in September, for example, DR Horton [DHI] -33%, Lennar [LEN] -33%, KB Home [KBH] -34%.
Inventories of single-family houses for sale at all stages of construction in February was essentially unchanged at 494,000 houses, up by 8.1% from the bloated levels a year ago, and up by 45% from February 2019.
Inventories of the past five months have been at the highest level since December 2007, during the Housing Bust.
South: new houses for sale at record highs for months.
In the South, inventories of new houses for sale at all stages of construction have been at record highs for months – at 290,000 to 304,000 houses for sale – having surpassed the highs of the Housing Bust for the first time ever in May.
In February, inventory for sale of 296,000 houses was up by 6% from the already bloated levels a year ago, and by 72% from February 2019!
The housing market of the South, a huge Census region, is dominated by Texas and Florida (see map of the four Census regions at the top of the comments). It’s by far the largest market for new houses in the US: In February, it accounted for 60% of new houses for sale in the US, and for 66% of US sales of new houses.
Massive incentives and lower prices by homebuilders have stimulated sales. In February, sales were up by 18% year-over-year.
And supply dipped to 7.6 months, but this was still 38% higher than in 2019.
West: Inventory surges to highest since December 2007.
Inventories of new houses for sale at all stages of construction rose to 120,000 houses in the West, the highest level since December 2007, and up by 10% year-over-year, and up by 60% from 2019 (see map of Census Regions at the top of the comments below).
The market for new houses in the West, the second-largest in the US, accounted for 24% of the US inventory of new houses and for 20% of US sales of new houses.
But sales in the West fell by 14% year-over-year and by 25% from February 2019.
Supply in February rose to 10 months, the highest of any region, up by 28% from a year ago, and up by 80% from 2019! Homebuilders need to sharpen their pencils to get this inventory moving:
The other two regions.
The South and West combined accounted for 84% of new house inventory and 86% of new house sales in the US. They move the needle.
The Midwest and the Northeast carve up amongst themselves the remaining 16% of the new-house inventory and 14% of new-house sales. Some of the big states in those regions have lost population over the years, the cities are already dense and huge, and big new developments are not a big priority.
Inventory in the Midwest remained for the fourth month in a row at 47,000 new houses for sale, up by 9.3% year-over-year and up by 15% from February 2019.
Sales at about 6,000 houses in February were down from a year ago, but roughly the same as in 2019. Supply remained at about 8 months.
Caution with these small numbers of sales: Census rounds its sales estimates to the nearest 1,000: these “6,000” sales could mean anything between 5,501 and 6,499.
Inventory in the Northeast rose to 31,000 new houses for sale, up by 19% year-over-year and up by 11% from February 2019.
Sales of about 2,000 houses in February were down from a year ago, likely the bad weather. Supply remained at about 8 months.
Even greater caution: There are minuscule sales figures rounded to the nearest 1,000.
US sales dip YoY despite price cuts & incentives.
Sales of new houses at all stages of construction rose in February by 1.7% year-over-year, to 59,000 deals, not seasonally adjusted, driven by the sales increase in the South that more than made up for the drop in the West. Compared to February 2019, sales were still down by 6%.
These sales are based on contract sales, not on closed sales. Things can happen that prevent contracts from closing, such as not being able to get affordable insurance or financing falling through.
Homebuilders overall have been selling houses at a slower clip than they’ve been building them, which is why inventory levels of new houses for sale in the US overall have continued to surge.
Supply at 8.4 months was up by 6% from a year ago and by 40% from February 2019.
Thanks to the incentives, promos, lower prices, and mortgage-rate buydowns, sales of new houses have held up at decent levels – though they’re nothing to write home about – while sales of existing homes experienced the worst February since February 2009:
Sales of completed houses rose 16% year-over-year in February to 29,000 houses and were up by 26% from February 2019, as builders have given up profit margins – some of the biggest have given up 2 to 4 percentage points from the fat margins a few years ago – to aggressively sell what they built.
Median price wobbles along below the 2022 peak.
The median contract price of new single-family houses at all stages of construction that sold in February fell to $414,500, down by 10% from the peak in October 2022. January’s originally reported spike to $446,300 was revised down to $427,400.
The six-month average, which irons out the random volatility and the revisions, ticked up to $417,300, below where it had been in October, back where it had first been in April 2022, down by 1.5% year-over-year, and down by 5% from the peak in late 2022. In recent months, it has been roughly stable (red).
But note: these are contract prices that do not include the costs of the mortgage-rate buydowns (which show up on builders’ financial statements in gross margins as a cost) and certain incentives, such as free upgrades. So these median prices are not a great reflection of how aggressive actual pricing – including mortgage-rate buydowns and incentives – is in the market.
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It’s really funny to see how polar opposite the two sides are in terms of what this data can mean. Case in point, one look at sub-reddit REbubble, with a graph of this data and the headline is “Supply of New Houses for Sale Totals 500,000 the Highest Level Since 2008” then if you hop over to REbubblejerk which makes fun of the non-house humpers, you see the same graph and this is the headline “Ignore the population increase guys, crash coming for real, I can feel the crash”
Just find it really hilarious especially since both posts were on top of one another on my reddit feed.
Interesting to see the West went up quite a bit too but I am sure for some, LA/OC/SoCal exceptionalism will set in and this “west” somehow doesn’t include those region…cause not in my hood…
Despite the California optimism and sunny demeanor — surf’s up! radical! — high home prices have driven buyers OUT OF STATE to places like Phoenix and Seattle, and will continue to do so as long as Californians dwell in a state of rapturous illusion. To move those houses, as Wolf says, prices must come down. This is a bubble we’re in, and only the ultra-prosperous are paying those prices.
My parents (SF Bay area CA) have been looking to downsize into a single story as they get older. There is indeed some new construction available in their area, but it’s all larger 2 story stuff.
Also, they are totally spooked by the possible uninsurability of these new houses, which are invariably a little further out of town and more in the hills.
Looks like it’ll be a stair lift or elevator or something.
California is not optimistic and hardly sunny in their daily outlook. Seems to me they are more dog eat dog.
Given the hunger for profits by the Silicon Valley sociopaths it’s understandable.
Realtors are really scumbags for being so greedy and have been forcing bidding wars in a market that should have never have gone so high when back when interest rates were at 2 percent. If you even want to look at a house, the pushy realtor shoves it down there throat and overly agrees about the property when a person has even looked at them. I am sickened that they fought rent control in California. It is issue that was not their except it might hurt prices from going up. Well rents are falling now so even though law didn’t pass, they wasted their money. See you greedy realtors if price would have stayed the same is better then bubble where nothing sells. If you really want to blame people, I would have say Trump had no busy getting involved with rates being cut when they overreacted with COVID 19, and these dirtbag realtors that really do not have a job with much of a skill except the fact that they know how to rip people off through illegal price gauging not supply and demand which it should be. People stop believing these pics crap realtors!
“But the publicly traded homebuilders have been singing the blues, and their shares have careened lower from their highs in September, for example, DR Horton [DHI] -33%, Lennar [LEN] -33%, KB Home [KBH] -34%.”
We can pontificate about the morality of the US housing market, making fresh highs in price while the sales set fresh lows. The builders can’t sell their product at the ask price because the bid price is at the buyers affordability level that is at least forty pct lower.
That spells trouble for the retirees and their existing home prices.
Here is a map of the four Census regions:
Great analysis. Thanks!
Time to return to ZIRP and get this inventory moving!
Time to lower prices further and get that inventory moving.
Time to let interest rates go up and create another FOMO panic to move the inventory.
Yes, there are certainly a lot of new developments around where I live (north of Houston, TX) and the houses are selling with appropriate builder discounts and goodies added. Houses probably in the thousands being built. Seems like most of the buyers are young families with small children and the vast majority are Hispanic.
Jobs are quite plentiful here and traffic is nuts during rush hour. So I guess it’s all good around here.
I didn’t mention this in the article, but Lennar paid 13% of its revenues in incentives in the last quarter, roughly double from before the pandemic and the highest since 2009. But it also booked a small sales gain.
KB Home, which is trying to maintain its profit margins, booked a sales decline.
Those are the two approaches homebuilders are taking. It’s one or the other.
And their stock prices are imploding….
Yes, either way, LOL.
Lennar just acquired the builder who built my 2 year old home last month (Rausch Coleman). They (Rausch) were in business for 65 years and have (had) several new home developments in process here. Lennar is spreading its wings here in the area.
Theyre builing garbage and selling what they can at huge profits so got lots of room to discount em.
Probably ride the retirement wave as long as they can then prices may moderate. Lots of cash in those hands still. Meanwhile rent seeking systems for the rest of em.
Banks still tighter lending standards seems like, so might miss out on the big foreclosure crash n burn this time. Long slow burn in progress.
“Theyre builing garbage”
I’m out of patience with this BS. Everybody rails about how unaffordable homes are, and then you get these goofballs that complain that new houses are built at a lower cost to fit realistic budgets.
Prices are still this high with all the inventory, wow! When the fed lowers rates house prices are going to moon!
When Fed lowers rates further, mortgage rates will spike, as we have seen. The Fed cut by 100 basis points, and mortgage rates spiked by 100 basis points. So, the market is like, make my day. Maybe the Fed should try hiking rates, to see it that brings down mortgage rates.
Haha!
Good Reply WR!
People with vested interests have been hoping that FED cutting rates would bring down mortgage rates but the opposite is happening.
I can’t fathom how home prices can go up with affordability historically low.
I have been monitoring Western NC, Eastern TN, Eastern KY, Western VA, and Southern IN since pre-pandemic. Inventories are up but the quality of inventory is poor in the mid-priced range. Sellers of existing houses are ridding themselves of rentals, airbnb, poorly done flips, flood zone locations (at least as modeled by Flood Factor), and seemingly long vacant inventory held for appreciation. Any decent “homes” are on the market only a few days and sold at or near asking even if the location is not the best. Even houses at flood risk are going pending relatively fast if in a hot location — however, starting to see more discount on asking price and often “back on the market at no fault of seller”. The impact of recent floods and insurance company rates/denial of coverage, methinks.
Before you get too carried away with this not-in-my-area stuff, this article had zero to do with existing homes. It was all about NEW houses. And new-house inventory is up even in your area.
My son is trying to rent in NYC. I don’t know how the rental market correlates with new home data sets, but rentals in that space are plagued with all the sorts of extortions that come to life when demand exceeds supply…
8 million people on a small island…you do the math…
Me thinks that every real estate article like this should have its title amended to say
“Danger Will Robinson, Danger,” before the title.
The current housing market is such that Mr. Free Market is like Wyatt Earp in Tombstone when he says “You tell ’em I’m coming, and hell’s coming with me!”
No soft landing this time. NO SOFT LANDING.
With starter home sales almost non-existent. Skewing up the median price(math) of all sales. Is house prices as measured as bad as it looks, Wolf? I really enjoy your articles, thanks.