Existing home sales have been steadily declining, reaching the lowest levels in 30 years in 2023, according to the National Association of Realtors (NAR). Existing home sales rebounded slightly month over month in January 2024 (an increase of 3.1%) but were still showing a year-on-year decline of 1.7% from January 2023.
As of right now, things are where they stood throughout 2023 in terms of poor affordability combined with very low inventory (critical in some metro areas).
There is no news yet of existing home inventory levels magically improving—and there likely won’t be for the foreseeable future. With interest rates remaining as high as they are, existing homeowners will continue holding on to their homes.
Where the real estate market may be showing promising developments is in the new home sales segment.
New Home Sales vs. Existing Home Sales
Now, the 1.5% January month-over-month increase in new home sales hardly seems impressive. In fact, according to the U.S. Census Bureau data, new home sales were below market expectations—661,000 units sold versus the 680,000 predicted. And yet, if we zoom in on regional and annual figures, something very interesting begins happening.
According to the Census Bureau report, monthly new home sales “soared” in the Northeast—up 72%—and in the West—up 38.7%. The Midwest saw a 7.7% increase. The only region that saw a marked decrease in new home sales was the South: sales fell 15.6% here. By contrast, all regions reported existing home sales decreases except the West, where there was a modest increase of 2.8%.
Of course, monthly fluctuations in sales figures don’t give a reliable picture of longer-term trends. However, year-over-year figures give us a better idea of where the new homes market is headed: definitely up. Annually, new home sales were up in 2023 in all regions apart from the Northeast, where they remained flat. Overall, as of January, new home sales nationwide were up 1.8%. In contrast, existing home sales were down 1.7% year over year.
Again, normally, these numbers would not appear significant. But 2023 was no ordinary year for the housing market. It created the perfect storm of challenges for buyers. The decline in existing sales is completely in line with these conditions.
The increase in new home sales, on the other hand, is a figure to watch. It appears that buyers in many parts of the country are just going for it—buying new homes because that’s what’s available. That’s despite the fact that the median sales price of a new home is higher ($420,700) than the median sales price of an existing home ($379,100).
New Home Sales Are the New Normal
We can’t say that new homes are more desirable than existing homes (they certainly aren’t more affordable). We know that some people are actively looking for a new-construction home. Around 25% of buyers say that they want new construction homes as of the second quarter of 2023, and it’s higher than the number of people who do end up buying a new home. According to NAR’s latest Profile of Home Buyers and Sellers, just 13% of buyers purchased a newly built home in 2023 versus 87% who purchased an existing home.
The shift toward buying new homes is happening slowly—however, note that the market share for new homes has exceeded the typical 10% threshold. It’s true that many buyers are pushed into the new-build sector willy-nilly. After all, there currently is an 8.3-month supply of new homes versus just a three-month supply of existing ones.
But here’s the thing: This is the new reality of the housing market. Existing housing inventory won’t “unfreeze” itself in the coming months, and maybe not even this year, so the market will have to find a different way to thaw. Demand for homes isn’t going anywhere, and the increase in new home sales against the backdrop of high home prices and high rates speaks volumes for the lengths buyers are prepared to go to finally own a home.
If you needed convincing that new home construction was worth investing in up until now, this should be your cue. Warren Buffett is already doing it—and now we have data that point to the sector’s almost-certain expansion in both the shorter and the longer term.
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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.
