Blame rising construction costs as new home sales fall

New home sales fell to the lowest pace in a year, with prices jumping 18% on a year-over-year basis, due to the high costs and uncertain availability of building materials, lots and labor. Sales of newly built, single-family homes fell 5.9% in May to a 769,000 seasonally adjusted annual rate, according to newly released data by the U.S. Department of Housing and Urban Development and the U.S. Census Bureau. The May number follows significant downward revisions to the April estimate and previous months’ readings.

“New home prices have increased over the last year due to higher material costs and delays for deliveries,” said Chuck Fowke, chairman of the National Association of Home Builders (NAHB) and a custom home builder from Tampa, Fla. “Policymakers must take action to improve supply-chains in order to protect housing affordability. While lumber costs have come down in recent weeks, they are still more than 210% higher than a year ago. And OSB prices are up 380% over the last year.”

“Your biggest obstacle to building more homes, at least in California, is the ever-increasing regulations that require us to make more energy upgrades to lower consumption,” says David Teter, a contractor with Johnson Air in Fresno, Calif. “While this may be great in theory, it drives the building costs up and slows down the construction time.” He notes that a massive shortage of labor in the trades has “created the perfect storm in our state.  At the high school level, most trades are no longer taught, such as HVAC, electrical, automotive, plumbing, etc. Now, we have a huge labor shortage and, as a contractor, I’m stealing employees from other companies and other companies from me.  We’re all chasing the remaining trade workers while no new supply comes in.” 

He also mentions high fees that city building departments charge. “They are so prohibitive and punitive in nature that it makes a housing developer throw up their hands and say no.” In fact, according to the Association of Professional Builders (APB), 80% of builders will go out of business in the next five years. Because many builders struggle with cash-flow, the rising costs of building materials, generating quality leads, or a lack of business education many also suffer from a more silent issue. 

Expected that new home sales fall

“As expected, new home sales have continued to soften this spring. While higher prices have shifted some buyers to the sidelines, NAHB survey data indicates that approximately 20% of builders have limited sales activity in recent months in order to manage supply-chains of materials and labor availability,” said NAHB Chief Economist Robert Dietz. 

A new home sale occurs when a sales contract is signed or a deposit is accepted. The home can be in any stage of construction: not yet started, under construction or completed. In addition to adjusting for seasonal effects, the May reading of 769,000 units is the number of homes that would sell if this pace continued for the next 12 months. 

Inventory remains low at a 5.1-month supply, with 330,000 new single-family homes for sale, 3.8 percent lower than May 2020. Supply-side challenges remain an issue, with the count of new homes sold that had not started construction, up 76% over the last year. The count of new homes sold that are completed and ready to occupy is down 33%. 

The median sales price was $374,400, up 18 percent from the $317,100 median sales price posted a year earlier.

“Entry-level buyers are being most affected by higher prices,” noted Dietz. “Just a year ago, shares of sales priced below $300,000 accounted for 44 percent of sales, while this May it has dropped to 26 percent.”

Regionally on a year-to-date basis new home sales rose in all four regions, up 48.7 percent in the Northeast, 33.5 percent in the Midwest, 32.3 percent in the South, and 5.6 percent in the West. These significant increases are due in part to lower sales volume during the Covid crisis a year ag