New-Home Sales Climb as Builder Incentives Pay Off

The spring housing market has gotten off to a sluggish start due to higher mortgage rates, but new-home sales appear to be a bright spot.
new home under construction
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Sales of newly built single-family homes jumped nearly 9% in March, reaching their highest level since last fall, the Commerce Department reported Tuesday. With limited inventory options in the resale market, more buyers are eyeing new construction.

Home builders are showing more willingness to offer incentives, such as price reductions, credits for closing costs, and mortgage rate buy-downs, which are helping buyers with affordability. Also, new-home prices are coming closer in line with the resale market. The median sales price of a new home was $430,700 in March, compared to $393,500 for existing-home sales. About 22% of builders say they cut prices in April, with an average reduction of 6%, according to the National Association of Home Builders/Wells Fargo Housing Market Index.

“Although home prices and mortgage rates remain high, prices have been rising more slowly, and home builders have been introducing a broader mix of smaller homes in order to bring prices within reach of more home buyers,” says Gregg Logan, a housing analyst and managing director at RCLCO Real Estate Consulting. “As rates come down later this year, we expect that trend to continue.” Logan anticipates lower mortgage rates in the second half of this year, which he believes will lead to stronger new-home sales in the third and fourth quarters.

Home buyers continue to face limited options on the resale market, although existing inventory has improved somewhat this spring. But buyers may soon face more limited options in the new-home market as well. Construction on newly built single-family homes dropped by 12.4% in March, and permits—a gauge of future construction—fell to a five-month low.

“Builders are grappling on several fronts as the inflation fight continues,” says Carl Harris, chairman of the National Association of Home Builders. “Higher interest rates are increasing the cost of housing for prospective home buyers and raising the development and construction cost for builders of homes and apartments.”

The latest new-home sales data does not reflect the recent rise in mortgage rates: The 30-year fixed-rate mortgage jumped above 7% last week. Before then, higher mortgage rates were already pushing on home buyers’ budgets and were blamed for a sluggish start to the spring homebuying season. Sales of existing homes fell 4.3% in March compared to February, according to the National Association of REALTORS®.

New-home sales likely will fall next month, housing analysts say. “Builders completed construction on almost 350,000 new homes in the first three months of 2024, and they were eager to sell them,” says Holden Lewis, home expert for NerdWallet. However, he adds, “all of these factors—the shortage of existing homes, completions of new homes and incentives—are beginning to fade.”