This story was updated on May 24, 2022.
This is the second installment of an Inman series digging into, and explaining, routine real estate economic metrics and how they’re used to illuminate the current housing market and inventory crises. Don’t miss part 1, The Inman handbook on pending home sales, and part 3, The Inman handbook on exisiting-home sales.
Real estate professionals rely on numbers and data, and new-home sales are one of those metrics that help people in the industry keep an eye on the pulse of the market.
So, where does the data come from and what does it mean? What is it telling us exactly?
The numbers actually tell us a lot about the health of the market, and where it might be heading in upcoming months.
In particular, as agents continue to grapple with tight inventory across the country, they’ll want to keep an eye on new-home sales figures. Read on to learn more about why.
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New-home sales are the number of newly constructed homes that are sold.
According to the U.S. Census Bureau’s website on new residential sales, “a sale of the new house occurs with the signing of a sales contract or the acceptance of a deposit.”
Therefore, under this definition, a new-home sale may be on a property that’s completely constructed, or one that has not even begun to be built. A property is categorized as “new” if it hasn’t previously been bought or sold.
New-home sales data is generated by the Survey of Construction (SOC), which is funded by both the U.S. Department of Housing and Urban Development (HUD) and the U.S. Census Bureau. Census representatives from across the country take a sample of new residential construction projects from roughly 900 permit offices, according to Bill Abriatis, branch chief of the Residential Construction Branch, Economic Indicators Division, at the Census Bureau.
“Once a project is in the sample, the field representative will follow the case and collect things such as construction start date, completion date, sales date, and characteristics data such as how many bedrooms it may have,” Abriatis told Inman in an email. “New Residential Sales is one of the products produced from this collection.”
New housing construction data began being measured and collected in the United States as far back as the 1920s by the Bureau of Labor Statistics, according to Abriatis.
The Bureau of Labor Statistics continued to collect the new-home construction data until 1959, at which point, the project was moved to the Census Bureau, and the SOC was initiated in order to measure new-home construction starts.
By 1963, HUD started funding the SOC so that, combined with resources from the Census Bureau, the two groups would have the capacity to collect and release sales and other data on new single-family homes.
“We should care about [new-home sales data] because the new-home sales are really the additional homes that are coming in the market,” Gay Cororaton, director of housing and commercial research for NAR, told Inman. “If you don’t have new-home sales increasing, you’d have tighter supply.”
During the prolonged inventory shortage that the U.S. has experienced over the last several years, which has been exacerbated just within the last two years or so amid a catastrophic pandemic, industry economists and others have kept a close watch on new-home sales figures because they give the industry an idea about how much more or how much less stressed inventory may be in the weeks following the New Residential Sales reports.
“Sales [of] newly constructed homes are a key component to solving the housing crisis because we have been in a housing shortage for the past decade,” Sheharyar Bokhari, a senior economist at Redfin, told Inman.
Bokhari added that new-home sales have kind of a “multiplier” or domino effect on inventory overall. Because new homes are traditionally a bit pricier than existing homes, existing homeowners will typically graduate into a new home. That move then opens up an existing home for other buyers — particularly first-time homebuyers who will likely have a smaller budget.
“New construction is very important in moving the market, building homes and getting people to move up,” Bokhari said.
The data that’s intrinsically related to new-home sales figures, of course, is housing starts and housing permits, which provide an even more preliminary indication of how much inventory can be expected to enter the market in upcoming months.
New-home sales have been on a bumpy ride for the past decade, at least. In 1999 and through the early 2000s, new-home sales made up approximately 15 percent of all single-family home sales. Then, after the housing market crisis launched the country into the Great Recession around 2008, builders curbed their enthusiasm significantly and new-home sales fell to about 6 percent of all single-family home sales.
“It’s understandable because there was some overbuilding prior to the housing crash, and then there was not a lot of construction going on [afterwards],” Cororaton told Inman.
Since then, new-home sales have been steadily climbing, for the most part, along with new homes being built, but a few different market factors have continued to stress inventory.
For instance, Bokhari said that as baby boomer-homeowners grow older, many have bucked trends of generations past by choosing to age in their homes, rather than downsize to apartments, living with family, or moving to an assisted living center. At the same time, millennials, who delayed homeownership because of student debt, are now finally starting to enter the market, creating an overlapping of two generations of homeowners at an unprecedented degree.
“Increasingly, the trend is to age in your house, so the median tenure in homes used to be eight years in 2010. Now it’s creeped up to 13 years of people living in their homes,” Bokhari said. “And that’s just the change in the preference of the older population — they want to age in their own home. So, that means they’re not selling their house.”
Other issues, like pandemic-related supply costs and shortages have also kept new construction in check over the last two years, which also has prevented new-home sales from making significant strides.
The Census Bureau and HUD released their most recent new-residential sales report on May 24, which showed that new-home sales tanked nearly 17 percent between March and April to a seasonally adjusted annual rate of 591,000. Economists had projected much better, estimating a rate of about 749,000 sales.
It was the largest month over month drop in new-home sales in nearly nine years, and sales hit a two-year low not seen since the height of pandemic lockdowns in April 2020.
The dismal sales rate reflects just how much buyers have struggled with the new reality of 5 percent-plus mortgage rates and rising home prices in the last few weeks.
“Rising mortgage rates and rising home prices have combined causing the market to level off at more balanced supply and demand conditions,” RCLCO’s Kelly Mangold said in a statement emailed to Inman.
“The market continues to feel impacts of geopolitical turmoil and supply chain issues, yet millennial households continue to demand for-sale housing, and many are migrating from high-cost coastal markets to high-growth sunbelt markets where builder inventory is higher.”
Although the decline in sales was not welcome in terms of what it suggests for the economic health of the country, fewer sales will gradually lead to a more balanced market and more inventory — helping to alleviate a problem that’s been plaguing the real estate industry for years.
As of December 2021, one-third of all houses for sale were new construction, an all-time high for the industry, according to a Redfin report.
Even as the most recent numbers defied expectations, Mangold said the overall state of the housing market remains relatively strong.
“The for-sale housing market has remained a strong performer during the entirety of the pandemic, and despite the somewhat uncertain economic conditions — demand for additional new housing remains strong,” she said in a statement.
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