There is some interesting news for would-be homebuyers that have been frustrated over the past year. According to a recent headline from CNBC.com, sales of new single-family homes has dropped, potentially signaling that the recent housing boom has ended. As reported in the article, “Sales of newly built homes dropped in June to the lowest level since the early days of the coronavirus pandemic in April 2020, according to data released by the U.S. Census Bureau on Monday. Sales of new single-family homes fell to an annualized rate of 676,000, 6.6% below May’s rate of 724,000 and 19.4% below the June 2020 level of 839,000.” The past year has certainly been a challenging one for those looking to buy or rent a single-family home. Many have been frustrated with low inventories, soaring home prices and bidding wars. Any sign of the market cooling would be welcome by many buyers.
However, we believe that a more thorough understanding of these statistics is in order. While it may be true that sales of new homes dropped to the lowest level since the early days of the pandemic, the reason those sales have slowed is more important to understand than the number itself. It is more likely that sales have dropped because a significant portion of would-be buyers were forced to step away from the market. As reported in the article, “After a year of frenzied buying and price gains in the double digits, newly built homes are now out of reach for much of the demand that remains in the market.”
As we have discussed at length in the past, there is currently a shortage of both new and existing homes for sale in the market. While the inventory of new homes for sale may have climbed slightly from its all-time low, it is still at an historically low level. Therefore, both new and used homes for sale remain in high demand and continue to fetch elevated prices. So high in fact that they are becoming unaffordable for all but a few potential buyers.
Making matters even worse, when new homes are being built, they are generally focused on the high-end of the market. From the article, “Most of the homebuying is on the higher end of the market, and builders cannot afford to put up affordable homes due to skyrocketing construction costs. Softwood lumber, in particular, spiked more than 300% during the pandemic, and while it has fallen back dramatically in the last month, it is still about 75% above its 2019 average.”
Therefore, the drop in new home sales is likely not a sign that the boom is over. In fact, it may mean that home buying demand is being further depressed and home buying activity is being artificially delayed. As covered in the article, “While there is unquestionably still strong demand from buyers, much of it is being squelched by affordability and supply issues. Those signs clearly showed up at builder home sites in June and have been a factor in weakening homebuilder sentiment for the past two months.”
For many families, the ability to buy a home is simply being kicked down the road until a day in the future in which more homes become available at prices that people can afford. However, no one knows for sure when that day will come. Far from being the signal of a housing boom coming to an end, the recent slowdown in new home sales could be a further signal that the supply/demand picture in housing remains far out of equilibrium. If that is the case, it would not be surprising to see strength in home prices for some time to come.
Steve Sapourn is an active real estate investor, Aloha Capital’s co-founder, and portfolio manager. At Aloha, Steve has overseen more than 1300 real estate investor loans in 35 states. He has managed alternative investments in a variety of asset classes for over 25 years. He has deep experience in designing low-risk portfolios that reliably outperform benchmarks. Over his career, Steve has served as portfolio manager for a Fund of Funds, where he analyzed hundreds of alternative investment strategies. In addition, he has developed and implemented quantitative trading strategies in the futures, stock, and volatility markets. Steve’s long and diverse career benefits Aloha’s investors.