New Home Sales Climb Higher

New home sales, which are recorded at the contract signing, rose 11.9% in December, following a downward revision in November sales. Sales ended the year 14% below December 2020 levels. Significant shortages of materials, land and labor are ongoing headwinds for builders who are seeing the busiest demand period since the last housing bubble.

Home prices rose at an astronomical pace in 2021 as strong demand fueled by ultra-low mortgage rates was met with a significant shortage of available homes. More than 50% of new homes sold since July have been in the $400,000 and higher range; that trend was bucked in December with only 46% of homes sold in that price range.

Buyers will continue to face record-high home prices and bidding wars into 2022, even as more supply comes on line. High materials prices and more homes being built at the higher end are adding insult to injury.

Separately, existing home sales, which are recorded at the contract closing, fell 4.6% in December, ending three straight months of growth. Buyers continue to face a lack of homes for sale; the current sales pace translates to only 1.8 months of supply, a record low. Six months is considered necessary for prices to reflect a balanced market.

Rising mortgage rates are not discouraging all buyers. Some are still jumping at the chance to lock in historically low rates. First-time buyers made up 30% of existing home buyers in December; that share dropped to just 26% by November as more investors entered the market. Now, first-time buyers are jumping at the chance to lock in a low rate before mortgage rates climb even further. Strong mortgage applications for purchase will buoy home sales at the start of this year.

Bottom Line
Home sales in 2021 hit levels last seen in 2006. Lack of supply, especially at the entry level, will remain a hurdle in 2022. High prices and bidding wars will continue to sideline some would-be buyers. Builders are working through backlogs to bring more supply on line, which should eventually ease supply in some markets.

The Federal Reserve’s plan to shrink its balance sheet purchases and hike short term rates has already pushed mortgage rates up. That should help cool demand and allow supply to readjust. The wildcard is all-cash investors, who are flipping to rent and adding froth to the overall housing market.

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