Incentives and Speculative Building Have Boosted New-Home Sales; We Now See More Starts in 2023

New-home sales have remained resilient despite worsening housing affordability in recent months amid rising mortgage rates, with little relief in home prices in most markets. Year-to-date new-home sales through July were about even with the year-ago period, compared with a 22% decline in existing-home sales. The key to homebuilders’ relative success this year has been their ability to improve affordability by offering sales incentives, lowering base prices, and building smaller homes. According to the National Association of Home Builders, the share of builders offering incentives was 55% in August, up from 52% in July but down from 62% last year. One fourth of homebuilders reported lowering base prices by 6% on average. Homebuilders have also boosted production of speculative homes to capitalize on the tight supply of existing for-sale homes. Spec building also helps builders better manage construction cycle times and costs.

New-home sales and single-family starts have been stronger than we had expected this year. Multifamily starts have also been running ahead of our expectations, but we still think they will slow next year as the market will need to digest a record number of units currently under construction. We now project total housing starts to decline 10% year over year to 1.395 million units, up from our prior 1.295 million-unit forecast. We forecast total starts will decline about 4% in 2024, but that’s due to a 20%-plus decline in multifamily starts. We expect single-family starts will increase 6% next year. We forecast the median new-home sale price will decline 4% this year, but homebuilders, which report sales prices net of incentives, will likely report about an 11% decline in average selling price for new orders. We think the median existing-home sale price will decline by a low-single-digit percentage this year.

We don’t expect our forecast revisions to materially change fair value estimates across our U.S.-housing related coverage.