Sales of new single-family homes in the U.S. Declined in December, according to data released Friday by the Commerce Department’s Census Bureau. However, a concurrent reduction in housing inventory suggests builders are adjusting to market conditions, potentially paving the way for renewed construction activity.
New home sales fell 1.7% to a seasonally adjusted annualized rate of 745,000 units in December. This follows an increase to a rate of 758,000 units in November, revised upward from an initial reading of 656,000 in October. The data release was delayed due to last year’s government shutdown. While the monthly figures exhibit volatility – a characteristic of new home sales, which are counted at contract signing – the year-over-year trend remains positive. New home sales advanced 3.8% in December compared to the same month in the prior year.
The more significant development may be the shrinking inventory. New housing inventory decreased to 472,000 units in December, down from 485,000 units in November. Critically, the inventory of homes under construction is at its lowest level in nearly four and a half years. At the current sales pace, it would take 7.6 months to exhaust the supply of new houses on the market, a slight decrease from 7.7 months in November. This suggests builders are becoming more cautious about starting new projects until existing inventory is reduced.
The median new house price rose 4.2% year-over-year to $414,400 in December. This price increase, coupled with broader economic factors, highlights the ongoing challenges to housing affordability. However, a recent dip in mortgage rates may offer some relief to potential buyers.
The average rate on a 30-year fixed-rate mortgage fell to 6.01% this week, the lowest level since September 2022, according to data from Freddie Mac. This represents a decrease from 6.09% the previous week. Lower mortgage rates could stimulate demand and help to absorb some of the existing inventory, but the extent of this impact remains to be seen.
The decline in builder confidence, as reported by the National Association of Home Builders (NAHB), adds another layer to the complex housing market picture. The NAHB’s builder confidence index fell to 36 in February, marking the tenth consecutive month below 40. This pessimism is driven by elevated land and construction costs, as well as affordability concerns that are keeping potential buyers on the sidelines. Regionally, the Northeast and Midwest showed the highest confidence levels at 43, while the South and West registered scores of 35 and 33, respectively.
Builders are increasingly resorting to incentives, including price cuts, to attract buyers, but demand remains subdued. The NAHB suggests that policies aimed at reducing construction costs and increasing the supply of attainable housing are needed to address the current challenges. The organization’s chief economist, Robert Dietz, emphasized the need for policies that “bend the construction cost curve and enable additional supply of attainable housing.”
While new home sales represent a relatively small portion of the overall U.S. Housing market, they are an important indicator of builder sentiment and future construction activity. The combination of declining sales, shrinking inventory, and falling mortgage rates presents a mixed signal. The reduction in inventory, particularly homes under construction, suggests builders are responding to slowing demand and attempting to avoid a glut of unsold properties. This cautious approach could ultimately lead to a more stable housing market, but it also means that a significant increase in new construction is unlikely in the near term.
The recent slowdown in the housing market may also be contributing to the decline in builder confidence. Residential construction data for November and December showed an overall pickup in activity between those months, but levels remained significantly lower than at the end of 2024. The remodeling sector, however, remains relatively solid, potentially due to limited household mobility as homeowners opt to improve their existing properties rather than enter a challenging market.
The current situation underscores the delicate balance between supply and demand in the housing market. While lower mortgage rates offer a potential boost to demand, high construction costs and affordability concerns continue to weigh on builder sentiment and buyer activity. The coming months will be crucial in determining whether the housing market can regain momentum or will continue to navigate a period of uncertainty.
