New home sales see unexpected surge, but analyst says ‘entry level’ price is now much higher

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Contractors position a wall frame during construction of a new home in Walnut, Illinois.

Daniel Acker | Bloomberg | Getty Images

Sales of newly built homes in August hit the second-highest level in over a decade. Those numbers were released just after a homebuilding analyst at Raymond James upgraded Toll Brothers, Lennar and KB Home to outperform.

“We had been on the road with some builders, and they were displaying levels of confidence in current conditions we probably hadn’t seen in a couple of years,” said analyst Buck Horne.

Not only were builders confident, but buyers were buoyed by a sharp drop in mortgage rates. The average on the popular 30-year fixed hit a recent high of 4.35% in late April, according to Mortgage News Daily, and then began falling. By the end of August it was right around 3.5%, giving buyers significantly more purchasing power than they had in the spring.

“There was a question of whether buyers would respond to lower mortgage rates and they’ve decisively answered that question, and answered by quicker sales paces,” said Horne.

The buying, however, was all in the mid to luxury sectors. Just 10% of sales were for homes below $200,000, which used to be considered the entry level for the builders. The biggest gain in sales was at the highest end. The number of homes priced above $750,000 was up about 60% annually.

“Entry level has been redefined,” said Horne. “To the extent that entry level used to be $200,000, the realistic number is more like $300,000 is the new entry level.”

Surging demand in August caused a sharp drop in the supply of newly built homes for sale. In the top 25 homebuilding markets, supply went negative for the first time this year, declining 3.7% annually. The drop from July to August was especially dramatic. This as the supply of existing homes for sale also fell, according to the National Association of Realtors.

“Lower interest rates and a healthy job market have finally taken hold in the housing sector. The rise in new home prices is easing, but builders still are not significantly increasing the number of homes built for under $300,000, which half of homebuyers say they need to make a purchase,” said Robert Frick, corporate economist at Navy Federal Credit Union.

Single-family housing starts and permits both rose solidly in August, but builders are still focused on the move-up and luxury products. They cite high costs for land, labor, material and regulatory compliance as barriers to building cheaper homes.

“The area of the market that most needs the homes is still not getting it and is why renting/multi family will remain strong,” said Peter Boockvar, chief investment officer at Bleakley Advisory Group.

There is one red flag: mortgage rates began rising again at the start of September and are now at the highest level in almost three months. They are still lower than a year ago, but the more they rise, the less purchasing power fall buyers will have.

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