New home sale prices have reached record highs. Fueled by strong demand, you would think homebuilders are making record amounts of cash with home prices at their highest-ever levels.
So it might be surprising to learn the market capitalization of new homes sold in the U.S. peaked in December 2020, falling in the months since according to the latest updated data.
New home sales have been negatively impacted by a decline in home construction, which saw its biggest dip since the pandemic hit in May 2021:
Despite a historic shortage of homes for sale, homebuilders are actually slowing production, handcuffed by skyrocketing commodity prices and shortages of land and skilled labor.
Single-family housing starts dropped more than 13% in April compared with March, the U.S. Census reported Tuesday. That’s the sharpest decrease since last April, when the pandemic shut down the economy.
“I have to blame the difficulty in procuring lumber and other products, along with labor issues for the miss, in addition to likely cancellations due to skyrocketing costs for single family starts,” said Peter Boockvar, chief investment officer at Bleakley Advisory Group.
The rising prices homebuilders are having to pay for raw materials are being directly transferred to new home buyers:
Prices new and existing homes are at record levels, and the increases are accelerating at the fastest clip in over 15 years. Nearly half of all builders say they are adding escalation clauses to their sale prices because of rising material costs, according to a recent survey from the National Association of Home Builders.
“Escalation clauses specify that if building materials increase, by a certain percentage for example, the customer would be responsible for paying the higher cost. Including such a clause allows all parties to be on notice that the contract costs could change if materials prices change due to supply constraints outside the builder’s control,” according to a recent NAHB post.
Looking forward, lumber prices have peaked and have begun to fall as the available supply has begun to increase. Prices however are expected to remain at levels double their historical average for years to come according to an industry observer, meaning higher new home prices will be with us for some time to come.
For homebuilders, that positive development will be confirmed when the market cap for new home sales in the U.S. begins to rise, reversing its current trend.
U.S. Census Bureau. Median and Average Sales Prices of New Homes Sold in the United States. [Excel Spreadsheet]. Accessed 24 June 2021.
U.S. Census Bureau. New Residential Sales Historical Data. Houses Sold. [Excel Spreadsheet]. Accessed 24 June 2021.