US new-home sales remain tepid on affordability constraints

[WASHINGTON] Sales of new homes in the US remained weak in June as builders’ heavier use of sales incentives failed to motivate buyers put off by high costs.

Contract signings on new single-family homes increased 0.6 per cent to an annualised rate of 627,000 last month, according to government data released on Thursday (24 Jul). That fell short of the 650,000 median estimate in a Bloomberg survey of economists.

June’s results show US homebuilders are struggling to offset an ugly mix of high prices and borrowing costs by offering incentives and subsidising customers’ mortgage rates, which risk eroding profit margins. 

This week, Atlanta-based PulteGroup posted better-than-expected earnings, despite reporting a slowdown in orders. Sales incentives have grown to 8.7 per cent of its houses’ gross sale price, more than double a “normal” incentive load, executives said on an earnings call.

“I long for the days of more normal incentive loads of 3 per cent to 3.5 per cent,” chief executive officer Ryan Marshall said on the earnings call. “Hopefully as we get out into kind of future years, that will become possible again.”

An industry survey showed 37 per cent of homebuilders reporting cutting prices in June, and climbed even higher in July to a record in monthly data back to 2022. That poll also revealed weak trends in traffic of prospective buyers amid affordability constraints, which similarly restrained sales of previously owned homes last month.

“In line with yesterday’s soft existing home sales figure, these numbers underscore that housing demand has downshifted in recent months,” Stephen Stanley, chief economist at Santander US Capital Markets, said in a note. “Barring a steep fall in mortgage rates, which seems unlikely, there is little reason to expect a quick revival.”

Thursday’s government report showed the supply of new homes for sale in June increased to 511,000, still the highest level since 2007. In recent months, a growing inventory has caused many builders to pull back on groundbreaking, with new single-family construction falling last month to the lowest level in a year. The supply of completed homes for sale edged up in June to the highest since 2009.

The median sales price of a new home decreased 2.9 per cent from a year ago to US$401,800 – marking the fifth annual decline in the last six months. While new-home prices have softened the last couple years, they remain more than 23 per cent higher than the early months of the pandemic.

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Selling prices are “still too much for most Americans to afford as long as mortgage rates stay near 7 per cent,” Heather Long, chief economist at Navy Federal Credit Union, said in a note. “The encouraging news is there are more new homes for sale this summer than last year, and prices are inching down a bit. But it will take a lot more relief to see the real estate market unfreeze.”

Sales in the South, the biggest US homebuilding region, increased 5.1 per cent last month after falling 15 per cent a month earlier. Purchases also rose in the Midwest, while contract signings in the West dropped to the slowest pace in seven months.

New-home sales are seen as a more timely measurement than purchases of existing homes, which are calculated when contracts close. However, the data are volatile. The government report showed 90 per cent confidence that the change in new-home sales ranged from a 12.7 per cent decline to a 13.9 per cent gain.

Residential investment is expected to be a drag on overall economic activity, when the government publishes its initial estimate of second-quarter gross domestic product on Wednesday. Also that day, the National Association of Realtors will release a report on June contract signings in the home resale market. BLOOMBERG