Home builders are slashing prices to lure home buyers, but it may not be enough

By Aarthi Swaminathan

New home sales down in U.S. Northeast dropped by nearly 21%

The numbers: Sales of newly built homes in the U.S. fell in April, as home buyers scaled back in the face of high mortgage rates.

Buyers are held back by how much they can afford due to high interest rates, in addition to home prices staying high as well.

Sales of new homes fell 4.7% to an annual rate of 634,000 in April, from a revised 665,000 in the prior month, the Commerce Department reported Thursday.

The number is seasonally adjusted and refers to how many homes would be built over an entire year if builders continue at the same pace every month.

The pace fell short of expectations on Wall Street. Economists had forecast new-home sales to total 675,000 in April.

The rate of new-home sales was down across most regions, except in the Midwest, where sales rose 10%. Sales dropped most sharply in the Northeast, by nearly 21%.

The data from March was revised. New-home sales rose a revised 5.4% in March, compared with the initial estimate of an 8.8% increase.

The new-home-sales data is volatile on a month-on-month basis and is often revised.

Key details: The median sales price of a new home sold in April fell to $433,500 from $439,500 in the prior month.

About 44% of new homes sold in April were below $400,000.

The supply of new homes for sale rose 7.1% between March and April. The number of new homes for sale is also up 21.3% from a year ago.

New home sales rose only in the Midwest, while the Northeast, West and the South posted declines.

Overall, sales of new homes are down 7.7% compared to last year.

Big picture: Builders are feeling nervous about higher rates weighing on home buyers' decision to buy new homes, so they're cutting prices and upping incentives to sweeten the deal. In May, about 25% of builders cut prices, according to the most recent sentiment survey by the National Association of Home Builders.

About a third of single-family homes, 33.4%, listed for sale in the U.S. in the first quarter were new homes, according to data from real-estate brokerage Redfin, which is substantially higher than before the pandemic.

What are they saying? "The new home sales report completes a trifecta of bad news in housing this week," Robert Frick, an economist with Navy Federal Credit Union, said in a statement.

"Building is anemic, existing home sales missed estimates and now new home sales had a big drop and remain tepid overall," he said. "Lower interest rates will help both builders and buyers, but especially because we need robust building to make up for weak construction in the 2010s. Together these underscore we're not making headway in solving the nation's housing crisis."

Looking ahead: "Despite April's slightly disappointing data, we remain optimistic about the new homes market. We expect mortgage rates to decline from here, which should attract more buyers," Thomas Ryan, an economist focused on North America at Capital Economics, wrote in a note.

"However, the decrease won't be enough to end mortgage rate 'lock-in', maintaining a limited number of options in the existing homes market and pushing buyers towards newbuilds," he added. "We expect new home sales to reach 800,000 annualised by end-2025."

"The market is still dealing with high interest rates, low inventory, and nervous buyers and sellers," Bess Freedman, chief executive of real-estate company Brown Harris Stevens, told MarketWatch.

"We are finding that consumers are starting to accept where rates are; they still need to buy and sell for various reasons (divorce, marriage, kids, jobs)," she added.

"What's next? All eyes are on the election, inflation, and what will happen with taxes in the next year or so," Freedman said.

Market reaction: Major home-builder stocks such as D.R. Horton Inc. (DHI), KB Home (KBH), Lennar Corp. (LEN), and Toll Brothers Inc. (TOL) were down in early trading on Thursday. The yield on the 10-year note was over 4.4%.

-Aarthi Swaminathan

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05-25-24 0932ET

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