Real Estate: U.S. new home sales rise as home buyers maneuver inventory pressures

Nest Seekers International Chief Economist Erin Sykes discusses a 4.1% rise in U.S. new home sales, a 13-month high.

Video transcript

- We're also tracking the real estate reality here, US new home sales rising unexpectedly in April, hitting its highest level in just over a year as inventory issues push buyers to new homes. This comes as Americans also navigate elevated mortgage rates, making real estate a pricey game to play. Joining us now, Nest Seekers International Chief Economist Erin Sykes.

Erin, it's great to see you here. So certainly, an impressive number when it comes to new home sales. What does this really tell us about the current dynamics at play in the edge that it seems builders do have in this market?

ERIN SYKES: Yeah, well, it's finally nice to report some good news in the housing market. And I'm excited to see this particularly because typically these numbers are very lagging. This is numbers from April. And we've seen a lot of traction via boots on the ground agents in the last month or so saying that activity is picking up. So this just reiterates that is actually true.

And I think what happened here is that developers are industry insiders. So this number that is 13% or the best number in 13 months, it's developer-owned property selling to buyers not resales in the market. And that's particular because these developers they're the industry insiders that knew what was coming.

They saw the foreshadowing of the current market, and they reduced their prices and enhanced their different attributes in order to make deals happen. And we're actually seeing prices of new homes 8.2% lower than this time last year. So they really made quite a few concessions.

Now in contrast, independent sellers, those in the resale market, homes listed on MLS they were holding fast for those COVID highs. They thought that they could still get those numbers. But we've seen the price reductions kick in towards the end of April, throughout May, and now we're getting back on the same page. So we're seeing even footing between these new homes and resale homes.

- Bottom line, though, even though we're talking about a 13-month high, the reality is the supply just isn't keeping up with demand. That's certainly, as you point out, why we're seeing so many new home sales or that pace accelerate. What's the timeline look like right now? When you think about the mismatch between supply and demand, I mean, how quickly can we see that inventory buildup from the new-home side?

ERIN SYKES: Yeah, so that's it's really tough because right now developers are not pulling the trigger on new single-family home construction. And that's because materials are still very high. And also labor is still costly. So they don't see that margin.

Developers are not fully altruistic. Just because there is a shortage of inventory in the market doesn't mean that they're going to build things for costs. So they need to make sure that there is meat on the bones in order to motivate them to build these new homes.

And that said, there is a dearth of supply in the multifamily market. And when we look at new-home starts, we typically see that number driven by multifamily. And we've been seeing the single family pull back for quite an extended period of time. And that's where the true inventory shortage lies.

So you need to see that pickup. And then you'll need to see multifamily pull back a little bit. And the reason why we're seeing so many people interested in multifamily is because condos tend to be less expensive, less square footage than single-family homes, lower maintenance, people are splitting their time between two different locations now with the remote work from home. And unfortunately, people are getting into the perpetual renting cycle.

When you look at the potential of having a 7% mortgage versus paying the highest rent in history and potentially never getting out of that rental cycle and never owning a property and just paying your landlord's mortgage, 7% is not so bad. Ask our parents. They were paying 18%.

- But the problem is, though, Erin, a lot of people don't believe that or a lot of people don't see that at least right now. So what do you think mortgage rates need to fall to in order to spur that activity? Are we talking 6% or lower?

ERIN SYKES: So typically, we say, 6% is that tipping point. Anything above 6% is kind of high. Anything below is a win. But if you look over the 50-year historic average, we see that number is 7.77% as the average mortgage rate.

So really anything below 7.77% is still truly a logical number to get into for a 30-year mortgage. And I think people are coming to that realization. They were very hesitant to pull the trigger and make offers on homes the last six months, but we've seen that activity pick up because we keep hearing the Fed over and over again say, hey, we're not going to drop these rates until we see 2% sustained inflation.

That just doesn't mean one month of reading a 2%. That means 3, 4, 5 months reading a 2%. That means these rates are not going anywhere anytime soon.

- Not exactly what a lot of new first-time homebuyers want to hear. Erin Sykes, good to talk to you today. I really appreciate the time.