When new homes start selling at a discount to re-sale houses, it’s time to sit up and pay attention. Apollo Global Management’s Chief Economist Torsten Slok noted the anomaly in a recent note , the first time it’s happened in more than five decades.
Competition to attract buyers is fierce out there. The data on relative prices understate the dynamic because homebuilders have largely relied on mortgage-rate buydowns to move property in recent years, an effective discount of several percentage points that isn’t reflected in the nominal sales price. Existing home sales data, on the other hand, only track successful transactions, ignoring the growing numbers of disappointed would-be sellers.
The struggling new home market is the best gauge of how challenging it has been to sell a house this year. Production developers, on average, spent 7.5% of sales prices on incentives in the three months ended August, according to John Burns Research & Consulting. They’ve given up the average premium of 16% that new builds have commanded since 1973, based on the firm’s analysis of Census and National Association of Realtors data.
Homeowners needing to sell their properties are best off ignoring most measures of home prices that show flat to modest growth at the national level or the high prices their neighborhood commanded in 2022. Instead, be like struggling homebuilders and price aggressively.
The new-versus-existing-homes comparison is useful because while the market for new builds is the same as it’s always been — build homes, sell homes — the market for existing homes is rife with distortions.
Many would-be sellers have low mortgage rates that they’re unwilling or unable to give up. Growing numbers of recent buyers find themselves underwater or with thin equity cushions and aren’t in a position to sell at a loss. Some sellers are anchored to the high prices their communities hit in 2022 and are reluctant to accept that the market has softened. Even if sellers are more motivated than they may have been a few years ago, most don’t feel the same kind of pressure that a homebuilder needing to hit quarterly sales and earnings targets does.
Flattish existing home sales and pricing trends nationally mask other data that show more significant deterioration in housing. Sales volumes have stayed at about 4 million for the past three years even though resale inventory has risen significantly from the lows and is back to around 2019 levels nationally, albeit with a lot of regional variation. The amount of time homes sit on the market continues to rise as sellers price too high initially and eventually have to decide whether to cut the price or withdraw the listing.
Perhaps most concerning for sellers thinking about waiting until next spring is the fact that they are far from alone in hoping things will improve — delistings are surging heading into the end of the year.
The problem is that the core dynamic holding back buyers isn’t mortgage rates per se, but the overall lack of affordability and an uncertain job market.
Home prices have climbed 55% in the US over the past six years, according to the S&P Cotality Case-Shiller US National Home Price Index, while average hourly earnings have risen just 30%. The affordability gap wouldn’t close even if mortgage rates fall back to 3%. When jobs were abundant a couple of years ago and housing inventory levels were very low, the housing market was dysfunctional yet resilient. Those economic conditions are no longer with us, and gravity is slowly acting on home prices.
There are signs in the real-time weekly data that sellers are starting to get the message, leading to improving sales trends at lower prices. In a housing market update on Monday, Mike Simonsen, chief economist for Compass, said that weekly pending home sales are higher than they've been in the past three years, with asking prices per square foot down 1.5% year over year. Prices are falling at a faster rate now than they were at this time a year ago, and given current trends, could fall below 2023 levels by the end of the year.
Sellers who didn’t get offers on their homes this year shouldn’t assume next year will be better. Homebuilders have had the same optimistic assumption for a while, focused on a perceived structural undersupply of homes in the US and a belief that interest rate cuts would boost demand. They’ve been repeatedly disappointed by weak buyer sentiment and have, instead, had to respond to deteriorating market conditions with incentives. The assumption should instead be that elevated inventory levels, poor affordability and weak consumer confidence will continue to put downward pressure on home prices until we’re much closer to the affordability we had in the 2010s.
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