While sales of existing homes have begun to show some evidence of life, new home sales appear to be practicing the art of “cliff diving.” Sales of new homes reached a new record low for the month of May, and builders across the U.S. are struggling to make ends meet. But why aren’t the ratios between new and existing homes comparable? I believe there’s one major factor, and that is price.
Builders who are still marketing homes built during the past year or two, have a set cost in those homes, and are generally unwilling to sell them at a loss. Many of the homes were built during times of higher production costs than exist today, and those builders who have the financial strength to still be in the marketplace, refuse to sell a home for less than the cost to build. The builder’s problems are multiplied by the cost of carrying these homes, with interest on construction loans adding thousands and cutting profits to little or nothing.
On the other hand, homeowners who have owned their homes for several years, have a built-in cushion in that there home may be worth significantly more than they paid. While the seller may not be able to reap the profits of just a couple of years ago, they have more “wiggle room” than builders whose costs have only continued to rise with the passage of time.
According to the Census Bureau, seasonally adjusted sales of new homes were at a rate of only 342,000 for the month of May, more than 30% below the May 2008 sales of 509,000. These numbers would indicate a 10.2 months supply of new homes at the current sales rate.
In order for new home sales to see a significant increase, we’ll have to remove much of the inventory of existing homes, and that will be a slow process. While foreclosure sales, as a percentage of total sales, declined in May, there are still millions of potential foreclosures to come. Stabilizing the existing homes market is vital to restoring sales of new homes as well as the overall housing market.
While the sales reports are not really good news, it is a bit more positive for those wishing to sell their home. With builders adding inventory at record low rates, sellers struggling to find a buyer will have less competition from new homes than in previous years. The silver lining may not be blinding, but it exists nonetheless.
To view a graph comparing existing and new home sales click here: Calculated Risk Blog
For the latest news for those interested in buying, selling, building, remodeling, or repairing homes, visit: The Housing Guru
