New home sales plummet, but prices barely budge
May sales were well below April numbers and down 16.5% year-over-year, a sign that builder incentives may not be enough to overcome high rates and prices.
New home sales slowed considerably in May, even as builders continue to offer incentives — a sign that affordability is weighing heavily on potential buyers.
Sales of new homes were at a seasonally adjusted annual rate of 619,000 in May, according to the U.S. Census Bureau. That's down 11.3% compared to April and down 16.5% from a year ago.
The slowdown in sales pushed the monthly supply of new homes to 9.3 months, up significantly from 8.1 months in April and well above the 4-6 month level that is typically considered a balanced market. The all-time high for new home supply was 12.2 months in January 2009.
When existing homes are added into the mix, the supply remains a lean 4.4 months, according to the National Association of Home Builders.
Incentives aren't enough to overcome affordability challenges
While new construction has remained a relative bright spot in the housing market, largely due to the availability of builder incentives, high home prices and elevated interest rates continue to take a toll, said Bright MLS Chief Economist Lisa Sturtevant.
"Homebuilders had been enticing buyers with rate buydowns and other concessions, but for some homebuyers, those financial incentives are no longer enough to get them on the building lot," said Sturtevant.
Odeta Kushi, chief economist at First American, echoed that assessment, noting that overall supply and affordability issues remain barriers.
"The housing market remains structurally undersupplied and there are plenty of potential buyers waiting on the sidelines, as long as the payment-to-paycheck calculation pencils out," Kushi said.
First-time buyers feeling the affordability crunch
That payment calculation is looking bleak these days, especially for first-time homebuyers. Only 29% of first-time buyers could afford homes for sale nationally in the first quarter, down from 34% a year ago, according to First American's outlook report.
The report found that among major markets, only Memphis, Tennessee, was relatively accessible for first-time buyers, with 55% of homes considered affordable for the median renter. A handful of other markets were somewhat affordable, including Cleveland, with 49% of homes considered affordable, Louisville (47%) and Pittsburgh (45%).
The least affordable markets were all in California, with Los Angeles topping the list with only 1% of homes affordable to the median renter. It was followed by San Diego (2%), San Francisco and San Jose (both at 3%).
Rising inventory isn't pushing new home prices down
The law of supply and demand would suggest that more new homes for sale would mean lower prices. While increasing supply has given a little more leverage to new home buyers, it hasn't significantly impacted sale prices. The median sales price for new homes sold in May was $417,400, down only slightly from $417,900 in April. A year ago, the median price was $421,200, but dipped to $417,600 in June 2023.
Even though new home prices have declined modestly, that's not necessarily because builders are cutting prices — instead, builders are constructing smaller homes, said Robert Dietz, chief economist at NAHB.
With more existing homes staying on the market, it's expected that the third quarter will be slower than last year for new home sales, said Sturtevant. That slowdown appears to be affecting builder optimism, with the latest NAHB Housing Market Index finding that builder sentiment dipped again in June after falling sharply in May.