The Census Bureau reported new home sales for January at a seasonally adjusted annual rate of 670,000 units. This is old news, but more confirmation of what we have seen in the local North Texas housing market. The boost to new home sales at the end of 2022 and January of this year was the result of improved affordability. It was a confluence of several events. The key ingredients were as follows:

  • Overly loose financial conditions with many Americans still sitting on excess savings
  • Falling mortgage rates in December and January
  • Significant price reductions from home builders (including rate-buydowns)
  • Depressed resale inventory providing minimal competition for builders who had affordable inventory to move

At least two of these ingredients are already unwinding. A third is on the verge of correcting if the spring selling season brings some additional resale inventory back to the market.

It’s important to remember the Census estimates for new home sales do NOT factor in cancellation rates. Builders are still experiencing elevated cancellation rates caused by last year’s mortgage rate shock and inflated pricing. Cancellations improved during December and January as rates cooled, but the climb in rates over the last three weeks is already causing some contract bust-outs again.

Tri Pointe Homes, a quality move-up builder with product in the immediate area saw it’s cancellation rate spike to 42% in the quarter ending December 2022. Every major builder saw big jumps in their cancellations in the last quarter of 2022. That’s precisely why most of them got serious about lowering prices and moving some inventory.

Builders were also improving affordability with big concessions for rate buydowns. D.R. Horton, Lennar, Pulte and others have been offering rate buydowns as low as 4.25 percent to make new homes more attractive. This is one of the ways builders were able to get a leg up on existing home sellers. Those rate buydowns can provide a significant psychological boost to improve demand without lowering the reported sales prices. More existing sellers are getting the memo and trying to be more flexible. Some existing sellers are still in denial, hoping to wait it out for inflated pandemic level prices.

The Census estimates for new home sales are always noisy. As expected, we saw some downward revisions to previous months in the latest report. The key ingredient for the January estimate on new home sales was significant price drops for both median and average prices. Without improved affordability, new and existing home sales will remain stuck in the mud. NAR demonstrated as much with existing home sales in January that were 37 percent lower than a year ago.

The recent boost in contract activity to start 2023 is already getting clipped again with mortgage rates rising 89 basis points in the last three weeks. The Mortgage Bankers Association’s purchase application index just hit the lowest levels since 1995. Purchase application activity is down 41 percent from the same week a year ago in the latest report.

Those animal spirits calling a bottom in the housing market and encouraging buyers to bid up homes again are part of the reason rates are rising again. Any good news on the economic front simply exacerbates the need for the Federal Reserve to tighten policy even further. Inflation is still running way too hot. Higher rates are one of the few tools the Fed has in its arsenal to keep inflation from spiraling out of control again.

If you are in the market for a new home in North Texas, just realize it’s a confidence game, a standoff/stalemate if you will. There are some deals to be had, but builders are still throttling that rather large backlog into the market to avoid bigger price reductions on specs. A lot of the more attractive affordable inventory has been picked off the past two months. If you are patient, there is more where that came from. If you are okay with locking in current prices to build, that’s a decision that only you can make for yourself.

With resale inventory likely bottoming out here before the spring selling season gets started, new construction buyers should be careful to make sure they understand exactly what they are paying for. There are some nice new homes out there. There are also a number of conflicted sales reps still trying to convince prospective buyers to warm up to paying more money for less home (and much smaller pieces of actual real estate).

As with most things, beauty is in the eye of the beholder. That’s certainly the case with new homes. The following two charts demonstrate what buyers have dealing with over the past few years in terms of new home construction and price inflation.

Denton County New Home Prices January 2023

The recent reductions on nominal new home prices in Denton County look fairly significant at first glance. Upon closer inspection, however, you see that confidence game I was referring to. In terms of price per square foot (not even accounting for lot sizes), new home prices still look very high compared to what buyers were paying just a couple of years ago.

Denton County New Home Prices per Square Foot January 2023