New home sales hit their lowest level since the pandemic began

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Demand for homes was sky-high during the pandemic as mortgage rates have reached or almost reached a historical minimum. But maybe things are finally starting to cool down.

New home sales in June fell to their lowest level since April 2020, according to the Census Bureau. Now for clarity: New home sales refer to newly built homes, not existing homes that were previously inhabited. And sales of newly built homes fell to 676,000 year on year, down 6.6% from May and 19.4%. from June 2020. This is important as housing market experts were actually expecting a 3.4% increase in new home sales.

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Why have new home sales dropped?

In June, there were 6,3 months of new buildings in stock. This is more than the 5.5 month offer in May. On the contrary, last autumn there were only 3.5 months of new buildings.

But new buildings are more expensive than ever, as builders face increased material costs and labor shortages. In June, the average price of a new home rose 6% over the previous year. This is on top of the 15% to 20% annual growth we have seen in previous months.

While lumber prices have declined after a sharp rise earlier this year, many builders are still struggling to recoup their costs associated with more expensive supplies. And many are being forced to raise workers’ wages in order to induce them to take jobs – a problem noted in many industries, including restaurants.

Final result? New construction financially out of reach for many of today’s buyers. Those who buy a newly built home expect a higher down payment and more expensive mortgage… Although today’s mortgage rates are low, they may not be low enough to offset higher purchase prices.

Of course, the fact that buyers are resisting and not overpaying for homes can be seen as a sign that demand is finally starting to decline. This is good news at a time when so many buyers are trying to buy homes due to lack of inventory.

The basic laws of supply and demand tell us that when demand declines, prices tend to follow suit. Thus, June new home sales figures could be the start of a monthly trend.

Now the cost may not be the only thing that prevents buyers from buying new buildings. Some fear that today’s real estate is not built with the same quality materials that were used in older homes. While many common goods were hard to come by, it’s easy to see why shoppers might fear builders will cut corners where they can.

In any case, it will be interesting to see if new home sales continue to fall. If they do, it could open the door to more affordable buying options for potential homeowners later this year.

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