Halfway through 2023, the new home market continues to surge.
Despite pessimistic sentiment coming into the year, the industry has performed much better than anticipated. Considering that rates have risen to be much higher than expected, the positive results are even more stunning.
Mortgage rates: an unexpected rise
- Industry experts, as well as bond market futures, anticipated rates to remain stable or decelerate slightly. However, the opposite occurred, with mortgage rates rising to ~7%.
- Despite the unexpected rise in rates, both home builders and home buyers have smoothly navigated the mortgage rate environment. Stuart Miller, Executive Chairman for Lennar (the second largest home builder in the country that sells one out of every 10 homes in the country), summarized the current environment in Lennar’s fiscal 2Q23 earnings call:
- “Customers have adjusted to and accepted higher-for-longer interest rates. This environment seems to represent a new normal that is formed in the wake of the Federal Reserve’s aggressive interest rate hikes starting last year. The strong demand for housing that had been curtailed by sticker shock and affordability challenges has returned, while the housing market adjusted prices and incentives, including rate buydowns and production costs, in order to enable customers to afford needed shelter.”
Builder stock prices: an unexpected rise to near all-time highs
- Builders have become unlikely winners in the supply-constrained, rising mortgage rate environment, in good part due to current homeowners sitting tight rather than offering their homes for sale.
- Available inventory (builders have inventory to sell) combined with mortgage rate buydowns have drawn home buyers to the new home market.
- In a testament to builders’ success, stock prices for the publicly traded builders experienced significant growth during the first half of 2023—now up 85% year-to-date on average.
New home sales: home builder market share is over twice the norm.
New home sales jumped to 763,000 units in May (+20% compared to last May), the highest seasonally adjusted annual home sales level since February 2022.
- Home builders are successfully stepping into the supply void, adding communities, and drawing buyers to the new home market.
- Home builders now offer 28% of all the homes available to buy in the country, versus a historical norm of 13%. (See the below chart to view the spike in new homes for sale as a percentage of the total for-sale single-family inventory.)
In conclusion, the new home market has surpassed all expectations this year, despite rapidly rising mortgage rates.
Home builders have not only weathered the storm but have thrived amidst adversity. As we move forward into the second half of 2023, we are watching to see if the strength continues into the seasonally slower summer months. If the market changes, we are committed to making our clients the first to know.
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