As home builders aggressively slash prices to boost sales, prices of newly built homes are coming down.
The median sales price of a new home in June was $401,800, which was about 5% lower than in May.
Newly constructed homes in June were also far cheaper than existing homes. The median sales price of an existing home rose to a record high in June of $435,300.
The fact that new homes are cheaper than existing homes is considered to be an unusual shift in the market. Newly built homes have largely been more expensive than previously owned homes.
“This largely reflects two trends: New homes are getting smaller on average, and builders are doing more price cuts,” Heather Long, chief economist at Navy Federal Credit Union, told MarketWatch.
“Builders have been trying to respond to the urgent need for more affordable housing by constructing smaller homes, including townhomes, on more modest lots,” she added. That’s happening in addition to the price cuts builders are offering.
James Knightley, chief international economist at ING, agreed with that assessment. The lower prices of newly built homes could be due to them being built on smaller lots than existing homes, he told MarketWatch.
Read more: Pessimistic home builders are offering ‘outrageous’ incentives to lure buyers
New-home prices are falling as builders ramp up incentives and slash prices to boost sales as demand remains weak.
Sales of new homes barely rose in June, up just 0.6% from the previous month, as buyers stayed away from the housing market.
Sales of all types of homes, both newly built and previously owned, have been sagging over the last few months as buyers continue to struggle with elevated home prices and high mortgage rates.
Sales of newly built homes fell by the most in the Northeast, down nearly 28%, and rose by the most in the Midwest, up 6.3%.
“In line with yesterday’s soft existing home sales figure, these numbers underscore that housing demand has downshifted in recent months,” Stephen Stanley, chief U.S. economist at Santander U.S., wrote in a note. “Barring a steep fall in mortgage rates, which seems unlikely, there is little reason to expect a quick revival.”
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Over the last few months, builders have been struggling to sell homes they’ve already built. Stanley said they have too much inventory on their hands.
“Completed new homes for sale are still rising, inching up in June to 119K, the highest reading since 2009,” he wrote. But builders have cut back on building new single-family homes, so “the pipeline is thinning.”
To offload new homes, builders have increased discounts and have begun to slash prices. In July, 38% of builders said they cut home prices, with the average price reduction being 5%, the National Association of Home Builders said.
In its third-quarter earnings report, D.R. Horton DHI, one of the biggest builders in America, said it expects sales incentives to “remain elevated and increase further during the fourth quarter” but added that “the extent to which will depend on the strength of demand during the remainder of summer, changes in mortgage interest rates and other market conditions.”
Falling home prices may seem like a boon for buyers, but it’s not necessarily a good thing for the U.S. economy, Knightley said.
“The bulk of people in the U.S. don’t have massive equity-market portfolios. The bulk of people’s wealth is overwhelmingly in their property and their pension fund as well,” he said. So when home prices fall or are poised to fall, he said, “I am a little bit nervous” that those declines could negatively hurt consumers’ outlook regarding the economy and their interest in spending.
Read more: Home-buying incentives to increase in coming month, D.R. Horton says
Whether the price-cutting strategy will continue to pay off is also unclear. “Homebuilders have done yeoman’s work to buoy new home sales. But it’s no longer working,” Mark Zandi, chief economist at Moody’s Analytics, wrote on LinkedIn and X on Tuesday.
“The number of unsold new homes is on the rise and is as high as it’s been, save for the lead-up to the financial crisis. It’s hard to see homebuilding holding up,” he added.