The most recent new home sales report was concerning assales and prices are decreasing and inventory is rising. However, as the OC Housing News pointed out in an article earlier this week, if we look at those numbers more in-depth, builders may actually be doing exactly what we were hoping they would do for a long time; making the difficult transition from the move-up to the starter home market. Over the past few years, home builders have focused almost exclusively on the move-up market which has become saturated with inventory. The entry level market is coming back. There is currently less starter home inventory and, the homes sell much quicker than higher priced homes when they come available. Meanwhile, high end home inventory is building as the units take longer to sell. This is a complete 180 from where the market has been for the last few years.
The impact on new home sales is two-fold: 1) There are less units selling since less builders are constructing entry level homes (DR Horton was early to the space and others are just now jumping on board) and,2) Prices appear to be falling because the homes that are selling are entry level and therefore less expensive, pulling down the average and median sales prices.
This is a market development that is important for homebuilding to maintain its health and extend the current positive cycle. Look for more home builders to turn to entry level if the high end continues to stall out.
- OC Housing News – Homebuilders painfully transition from move-up sales to entry-level market published March 8, 2016
- The Wall Street Journal – Housing market takes on split levels by Joe Light, published on March 8, 2016
- Calculated Risk Finance & Economics – New home sales decreased to 494,000 annual rate by Bill McBride, published on January 24, 2016
Tom Farrell – Director of Business Development at Landmark Capital Advisors