New home sales increased for the second straight month. Homebuilders are now focusing on lower-priced and smaller-sized homes as evidenced by a lower median price. But the supply is still short of demand. Expect general push up to home prices in the upcoming months.
Construction of new homes was slightly below last year’s level. But at $282,000, the new home carries a price premium of 23 percent above existing homes price.
Specifically, new home sales rose 2.2 percent in May from one year ago after having risen a solid 8 percent in April. The latest pace of 546,000 annualized new home sales is the highest monthly tally since early 2008.
On average it took 3.9 months to find a buyer after constructing a spec home. Moreover the all-important months-supply of inventory is at 4.5 months, implying tight market conditions. The median price declined and was 1 percent below last year’s level. This implies that builders are not cutting prices, but rather building smaller-sized and more affordable homes, possibly in light of the rise in first-time homebuyers.
The gap between new home price and existing home price still remains very wide. It implies that existing homes provide better relative bargain in relation to newly constructed homes.
Even though new home sales are rising strongly in percentage terms, they are only about the half the activity as during the bubble years nearly a decade ago. This implies, first, that today’s strong activity is not likely to be a bubble. Second, there is more room to grow.
For the year as a whole, new home sales are projected to rise by about 30 percent in 2015. It’s a good time to be a homebuilder.
As an aside, glass and windows are requested more often in the new home construction. Long ago glass, because of impure materials, was never visually clear and people applied their creative skills in putting up stained glasses. Also there was tax on the number of windows so many homes from the medieval period were dark with few natural lights. Today, homes and condominiums have much glass and light, thereby providing the pleasant indoor-outdoor experience instantly and constantly.
Lawrence Yun is Chief Economist and Senior Vice President of Research at NAR. He directs research activity for the association and regularly provides commentary on real estate market trends for its 1 million REALTOR® members.