Housing Market Update: New Home Sales Increased in May
New home sales in May
New home sales increased to an annualized pace of 551,000—up 8.7% from the same month last year. They were also down about 6% sequentially from April. April’s initial print was well over 600,000, but it was revised downward. It’s important to understand that these numbers are estimates and that they’re often revised several times. April was an example. Investors should realize that these estimates can be volatile. As a result, you shouldn’t read too much into any specific number.
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At the end of May, there were 244,000 new homes for sale. This represents a 5.3-month supply. The National Association of Realtors showed that the supply of existing homes for sale was at 4.7—a very low number. It indicates tight inventory.
The economy needs the homebuilding sector to get back to normal production levels. Historically, the levels have been around 1.5 million starts per year.
Luxury pricing is plateauing
The median sale price for a new home was $290,400. The average price was $358,900. Since the bubble burst, the spread between mean and median home prices increased as homebuilders sell bigger homes. Now, that trend appears to be reversing. Some estimates have starter home pricing rising at close to 8% per year, while luxury homes are increasing at about 4% per year. Part of this is due to lower investor demand, especially from overseas.
The report shows that the sweet spot for new home sales is in the $200,000–$299,000 range. Builders with more exposure to entry-level buyers include PulteGroup (PHM), D.R. Horton (DHI), and Lennar (LEN). The luxury segment is represented more by Toll Brothers (TOL). Recently, Toll Brothers reported that average selling prices have been flat. The only segment really showing big increases is the luxury urban sector. Average selling prices are around $3 million in this sector.
Investors who want to invest in the sector as a whole should look at the SPDR S&P Homebuilders ETF (XHB).