New Home Sales Reach Lowest Level Since Start of Pandemic

New home sales are down. Could the housing market finally be cooling off?

The demand for homes has been sky high throughout the pandemic as mortgage rates have sat at or near historic lows. But things may finally be starting to cool off.

In June, new home sales dropped to their lowest level since April of 2020, according to Census Bureau data. Now to be clear, new homes sales refers to newly built homes, not existing ones that were formerly lived in. And sales of newly built homes fell to an annualized rate of 676,000, representing a 6.6% drop from May's levels and a 19.4% drop from June of 2020. That's significant since housing market experts were actually expecting new home sales to increase by 3.4%.

Why did new home sales decline?

In June, there was a 6.3-month supply of newly built homes available. That's up from May's 5.5-month supply. By contrast, last fall, there was only a 3.5-month supply of newly built homes.

But newly built homes are costing more than ever as builders deal with increases in the cost of materials and a lack of available laborers. In June, the median price of a newly built home rose 6% from a year prior. That's on top of the 15% to 20% annual gains we've seen in previous months.

While lumber prices have come down since soaring earlier this year, many builders are still trying to recoup their costs from when supplies were more expensive. And many are being forced to throw higher wages at workers to entice them to take a job -- a problem that's been noted across many industries, including restaurants.

The end result? New construction is financially out of reach for a lot of today's buyers. Those who purchase a newly built home are looking at a higher down payment and a more expensive mortgage. And while today's mortgage rates are low, they may not be low enough to offset higher purchase prices.

Of course, the fact that buyers are pushing back and aren't overpaying for homes could be taken as a sign that demand is finally starting to wane. That's good news at a time when so many buyers are struggling to purchase homes due to a lack of inventory.

The basic laws of supply and demand tell us that when demand decreases, prices tend to follow suit. And so June's new home sales figures could be the start of a month-over-month trend.

Now, cost may not be the only thing stopping buyers from purchasing newly built homes. For some, there's the fear that today's properties aren't being constructed with the same quality materials used in older homes. At a time when many common supplies have been hard to get, it's easy to see why buyers might fear that builders are cutting corners where they can.

Either way, it'll be interesting to see if new home sales continue to drop. If they do, it could pave the way to more affordable buying options for prospective homeowners later on in the year.