The month of April saw a 4.7% decrease in the sales of newly built homes as compared to March. Not only that, but there was also a significant 7.7% drop in sales from the previous year. These numbers paint a clear picture of the challenges currently faced by the housing market. The main culprit behind this decline seems to be the higher mortgage rates that are making it difficult for potential buyers to make a purchase. With mortgage rates skyrocketing from the high 6% range to 7.5% in April, affordability has taken a hit.
The median price of a new home sold in April was $433,500, which represents a 4% increase from the previous year. This rise in prices can be attributed to the fact that most of the homes being sold are on the higher end of the market. Buyers in this segment are less affected by mortgage rates as they often pay in cash. However, for the average buyer, the combination of soaring mortgage rates and escalating home prices is proving to be a major obstacle. Builders are finding it hard to lower prices due to the rising costs of land, labor, and materials, further exacerbating the affordability issue.
The Role of Big Builders
Big production builders like D.R. Horton and Toll Brothers have been trying to mitigate the impact of high mortgage rates by subsidizing them. While this has helped boost sales to some extent, the industry as a whole is still lagging behind its 5-year average. Despite the efforts of these major players, the overall new build industry is struggling to keep up with demand. The lack of supply and the high prices of new homes have created a significant barrier for potential buyers, especially those in lower-income brackets.
According to a new index introduced by the National Association of Home Builders and Wells Fargo, in the first quarter of 2024, a median household income nationally needs to allocate 38% to make mortgage payments on a median-priced new single-family home. For low-income families earning just 50% of the area’s median income, this number jumps to 77%. The growing housing affordability challenges can be primarily attributed to the shortage of housing units in the market. With a deficit of approximately 1.5 million homes nationwide, lower-income buyers are finding it increasingly difficult to enter the housing market.
Lack of Affordable Options
While the number of newly built homes has been increasing by 12% year over year, the majority of these homes come with a price premium. This trend, combined with the scarcity of affordable options in the resale market, is creating a tough environment for buyers. The rising prices of both new and existing homes are a direct result of the limited supply available. The lack of housing units, especially in the lower price range, is making it challenging for buyers to find suitable options within their budgetary constraints.
The surge in mortgage rates, escalating home prices, and the shortage of affordable housing options are posing significant hurdles for buyers in the newly built home market. While efforts are being made by builders and industry players to address these issues, a more sustainable solution is needed to make homeownership more accessible to a wider range of buyers. Until then, the market is likely to continue facing challenges in terms of affordability and accessibility for potential homebuyers.