Prices of New Houses v. Prices of Existing Houses: Why Sales of New Houses Hang in there as Sales of Existing Houses

Price Cuts and mortgage-rate buydowns, though costly for homebuilders, make new houses more attractive.

By Wolf Richter for WOLF STREET.

The median price of new single-family houses that were sold in January ticked up from December, but was down by 2.6% from a year ago and by 15.3% from the peak in October 2022 (blue line). At $420,700, the median price was back where it had first been in October 2021, according to data from the Census Bureau today

The three-month moving average, which irons out some of the monthly ups and downs, was essentially unchanged from the prior month, and at $420,700, was down 12.3% from its peak in December 2022 (red).

But mortgage-rate buydowns and incentives are not included in the price declines. These are contract prices and do not include the large and sometimes unexpected costs of mortgage-rate buydowns that homebuilders now use massively to maintain their sales volume in this market, where sales of existing homes have plunged because prices are too high at these 7%-plus mortgage rates.

Mortgage-rate buydowns lower the monthly payment – and also lower the profit margins of homebuilders – but do not lower the contract price of the house.

The price declines also don’t include other incentives that homebuilders throw in to make deals, such as free upgrades.

What these contract prices reflect are the lower price points that homebuilders are now targeting with smaller homes and less expensive amenities.

Price difference between new and used houses.

Homebuilders are now aggressively competing with homeowners, and the largest homebuilders have said so in their earnings calls. And price points between new and resale single-family houses have moved close together. D.R. Horton, the largest homebuilder in the US, has pointed out that with mortgage-rate buydowns, the monthly payments on a new house is lower than the monthly payment on an equivalent resales house.

The difference in dollar terms. The national median price of new single-family houses has fallen faster and further than the national median price of existing single-family houses (via the National Association of Realtors).

But there are some seasonal differences:  The median price of existing homes has a distinct seasonal high in June and a low in January, while prices of new houses are much less seasonal, but are very volatile month to month. So we look at the 6-month moving average of new and used house prices, which irons out some of the seasonal differences:

The difference in percentage terms. The median price of new houses (6-month moving average), is now only 7.1% higher than the median price of existing houses (6-month moving average).

Now add the mortgage-rate buydowns into the mix – and it becomes clear how relatively unattractive resale houses have become at their current prices, given the competition from new houses.

The unusual narrowing price difference also happened during the early phases of the Housing Bust, so in 2005 and 2006. Prices of used homes eventually fell hard enough and far enough in the later years of the Housing Bust to make them competitive with new houses again.

So sales of new houses have held up.

In January, 57,000 new houses were sold, not seasonally adjusted, up by 3.6% from a year ago, and down by only 3% from January 2019. By comparison, sales of existing homes have plunged by 20% from January 2019.

This documents the effectiveness of the strategy to offer houses at lower price points and to offer mortgage-rate buydowns though they squeeze profit margins of homebuilders. But they’re in the business of building homes, and they cannot just try to wait out this market, as many potential home sellers are trying to do.

Inventory for sale of new houses at all stages of construction has stabilized at very high levels. In January, it ticked up to 456,000 houses, same as in November, but up a little from December (not seasonally adjusted).

This inventory translates into 8.0 months’ supply at the January level of sales, which is more than ample supply:

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