New home sales data in May shows the affordable market is shrinking

Sales of new single-family homes fell 7.3 percent in May from April and fell 6.8 percent from a year ago, according to the latest data from the Census Bureau and the Department of Housing and Urban Development.

Average sales prices remained at $424,900 – flat year-over-year, up 2 percent from the previous month, according to new data released Wednesday – but that topline stability is misleading.

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A year ago, about one in five new homes sold for less than $300,000. In May that was about one in seven. The affordable part of the new construction market is shrinking.

“The affordable new home is becoming harder to build and harder to find, and that’s the real story,” said Maor Greenberg, co-founder and CEO of Spatialtold Inman.

What the top price doesn’t tell you

The flat median masks a significant shift in what is actually sold. The average sales price was $424,900, unchanged year over year. But the average sales price was $540,600, up 5 percent over the same period.

When the average rises but the median stays the same, it means that more expensive homes are being sold – not that the same homes are becoming more expensive. The middle of the market has not shifted, but the mix of transactions has shifted to the higher end.

The more expensive homes form a larger part of the mix, causing the average to rise, while the median stands still. The composition of the market changes, even if the price does not change.

Total inventory rose to 496,000 units in May, and completed homes have taken longer to sell each month this year. It has gone from about three months in January to almost four months in May.

At first glance it looks like a buyer’s market building. According to Greenberg, that is not the case.

“Higher inventory normally means oversupply, but look what’s in the 496,000,” Greenberg said. “Only 118,000 homes are finished. The rest haven’t started yet or are under construction. This isn’t a flood of empty, move-in ready homes; it’s a backlog of homes that builders have already committed to, piling up against a slower buyer pool.”

At the same time, the pipeline of future supplies is getting thinner. April’s Greenberg references showed that breakthrough is slowing while the number of committed homes piles up. It’s a combination that points to a supply crisis further away.

The disappearing sport

Greenberg said the disappearance of new construction projects under $300,000 is no mystery. Builders cannot make the economics work at current costs for labor, land and materials and still keep the price at entry levels. So they build a higher end market where margins are maintained.

“A fixed price protects profit margins,” Greenberg said, “but it is a shrinking business that survives by serving fewer, wealthier buyers and moving away from building starter homes.”

That withdrawal has consequences that compound over time. First-time buyers who had been priced out of the existing home market had to find relief in new construction. That relief does not materialize. Starter homes are not being built for an increasing part of the market.

“For the buyer, the price is not high because the homes have gotten better or because demand has skyrocketed,” Greenberg said. “The rung these buyers were reaching for has quietly disappeared.”

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