Here’s why new home sales tanked

Newly built homes are more expensive than they’ve ever been before. They are also more expensive when compared to similar existing homes than they’ve ever been before. And that is why sales are suffering, dropping an unexpected 9.4 percent in July compared to June, according to the U.S. Census.

They are simply out of reach for too many potential buyers.

You don’t have to do a lot of math to see it. The median sale price of a newly built home in July jumped more than 6 percent compared to July 2016, to $313,700. That marks the highest July price ever. Last December, the median price hit the highest of any month on record.

In addition, the price premium for newly built homes compared to comparable existing homes has more than doubled since 2011, according to John Burns Real Estate Consulting.

“Long term, the new home median price has been mostly 10 percent to 20 percent above the existing home median since 1990. Since 2011, however, new home prices have been at a 35 percent to 40 percent premium over resale prices,” John Burns wrote in a recent note to clients. “While the exact percentages aren’t perfect due to ‘apples and oranges’ comparisons, our consultants have been confirming for years that new home sales have been slowed by larger than usual new home premiums.”

Prospective home buyers view a kitchen while touring a model home at a PulteGroup housing development in Albuquerque, New Mexico.

Sergio Flores | Bloomberg | Getty Images
Prospective home buyers view a kitchen while touring a model home at a PulteGroup housing development in Albuquerque, New Mexico.

The supply of existing homes for sale is still extremely low, but the supply of newly built homes moved higher in July to 5.8 months of inventory.

“The scars of the housing bust are still fresh in the minds of many homebuilders, so it is not surprising that many are taking a cautious approach to ramping up production,” noted Aaron Terrazas, a senior economist at Zillow, in reaction to the July report.

Homebuilders are feeling slightly better about their business lately, but they continue to complain about the costs of land, labor, materials and regulation. They claim that is why they cannot build cheaper homes. Unfortunately, the lower end of the market is where most of the demand is and where supply is weakest.

“There is still no pickup in sales for homes priced below $300,000, and this is where most of the first time households would be shopping in,” wrote Peter Boockvar, chief market analyst at The Lindsey Group in a note following the Census release on new home sales. “I repeat that the housing industry needs a moderation in home price gains in order to better compete with renting where rents increases are now moderating.”

While the monthly sales read is volatile, the annualized read of 571,000 units marked a seven-month low, and sales remain well below the 25-year average of 727,000 annually.

Even luxury homebuilder Toll Brothers saw a significant drop in the average price of homes delivered, which it said was “due to a change in mix which was expected,” in its quarterly earnings report.

CEO Doug Yearley told CNBC that the company was not selling as many “very expensive” condos in New York City and was replacing those offerings with lower-priced million-dollar homes in New Jersey. He also noted Toll had entered the Boise, Idaho, market with lower-priced homes but was seeing strong growth in higher-priced California.

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