According to the National Association of Home Builders (NAHB), homebuyers in the existing home market may have a slight edge over those looking for new homes.
The association has released its latest version NAHB/Wells Fargo Housing Market Index (HMI) on Tuesdaywhich showed homebuilders are pulling back from price cuts and other sales incentives that boosted the affordability of new homes last year. The share of builders who used incentives last month remained stable at 65 percent. Of those who took advantage of incentives, only 36 percent said they included price reductions – down from 40 percent in the previous three months.
The index is based on a survey of homebuilders and is intended to “track the pulse of the single-family home market,” according to NAHB.
Housebuilders were quite pessimistic about the near future, with the six-month sales index falling from 50 to 46 points. The index for the number of new home buyers also fell, falling from 24 to 22 points. The perpetrator? Continued uncertainty about the economy, negative media reports and buyer expectations that prices and interest rates are about to fall.
The growing skittishness of the industry was reflected in the The US Census Bureau releases its monthly report on new housing construction on Wednesdaywhich covered trends for November and December.
November showed some promise, with the number of new homes rising 2.1 percent year over year. However, the following month brought significant losses, with the number of new homes falling 7.3 percent year on year. Permits did not fare much better, declining 8.0 percent year-on-year in November and 2.2 percent in December.
Bright MLS chief economist Lisa Sturtevant said a rise in existing inventory has impacted the new construction market, with homebuyers more likely to find what they want in the resale market. As a result, she said builders will be “more cautious” in the first quarter, waiting for spring to raise the bar.
“Despite a lower mortgage [rates]“In the fourth quarter, homebuyers remained cautious,” she said in a statement. “Affordability and economic uncertainty remain a barrier to homebuyers’ willingness to enter the market. Increased existing inventory has also made new construction less attractive in some markets.”
“As buyers show signs of returning to the market, it is likely we will see new construction production increase this spring,” she added. “Even as demand improves, builders face supply-side challenges. A lack of construction labor, higher land costs and often extensive local regulations will continue to make it challenging to build new homes, especially homes at lower prices.”
NAHB Chief Economist Robert Dietz provided a bird’s eye view of the new construction market at the International Builders Showsaying that homebuyers are likely to experience better affordability in the existing housing market this year.
“We expect sales prices to decline in most markets this year to improve affordability because existing homeowners now need to do the price discovery that builders have been doing since 2022, and they haven’t done that yet,” Dietz said in a statement Wednesday. “So we think this will happen in 2026 and that is of course necessary because if we look at the ratio of house prices to income.”
Dietz said the average home price is 4.9 times the average income, reflecting the ongoing challenge of closing the gap between wage and home price growth.
While there will be headwinds in the coming months, the NAHB’s chief economist says homebuilders are resilient and offering smaller floor plans at more affordable prices. The typical floor plan is 5 percent smaller than it will be in 2022, he said, causing the average price for new homes to drop 15 percent over the same period.
However, he said much more needs to be done to help younger homebuyers enter the market.
“Historically, the ratio of home prices to incomes, the 3-to-1 ratio, was a well-understood rule of thumb that had been around for a while,” Dietz added. “If the price-to-income ratio is 5 to 1, it is more difficult for those younger households to save, whether it is the 3.5 percent for a [Federal Housing Administration] mortgage or a 10 percent down payment on a conventional mortgage.”
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