Real Estate

September new home price drops to lowest in nearly 3 years, but not because builders are offering bargains

Key Points
  • The median price of a newly built home dropped sharply in September to $299,4400.
  • That was 8.8% lower compared with September 2018, according to the U.S. Census and was the lowest read since February 2016.
  • Exactly half of the homes that sold in September were priced below $300,000, compared with 43% one year ago. The actual number of home sales for properties priced below $200,000 doubled annually.
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New home sales miss expectations, down 0.7%

The median price of a newly built home dropped sharply in September to $299,4400. That was 8.8% lower compared with September 2018, according to the U.S. Census and was the lowest read since February 2016.

The decline was primarily due to a shift in the mix of homes selling, not any special deals from builders.

Exactly half of the homes that sold in September were priced below $300,000, compared with 43% one year ago. The actual number of home sales for properties priced below $200,000 doubled annually. Meanwhile the number of higher-priced home sales fell.

Mortgage rates likely played some role in the change. The average rate on the 30-year fixed started September at 3.46% and then climbed as high as 3.85% mid-month, according to Mortgage News Daily. The Census sales figures are based on signed contracts for homes, not closings, so they reflect buyers out shopping during the month, when rates were rising.

Sales of newly built homes dropped slightly compared with August, but were 15.5% higher annually.

The nation's big builders have not been lowering prices; in fact most have reported increasing prices and dropping incentives, given how high demand is. Atlanta-based Pulte Group, one of the nation's largest public builders, reported strong quarterly earnings this week, but the company's CEO, Ryan Marshall, told analysts that the market was heavily dependent on today's low mortgage rates.

"Certainly, the market is strong, but affordability I think has got to continue to carry the day, and we're still kind of balancing right on the -- we're teetering on the edge of a lack of affordability," said Marshall.

Pulte, like other big builders, is trying to build more entry-level homes, but the bulk of construction is still in the move-up and luxury markets.

"The industry is experiencing a slow inventory mix shift to more affordable entry-level housing," said Robert Dietz, chief economist at the National Association of Home Builders. "It is still limited in terms of supply, and we need more, but the shift has been occurring over the last three-plus years."

One example of that can be seen in home size, according to Dietz. The median new home size peaked at 2,515 square feet at the start of 2015. For the second quarter of 2019, it had declined to 2,245 square feet.

Builders are also putting up more townhouses, which generally come at a lower price point and are cheaper to develop. Builders say today's higher construction costs make it difficult to build less expensive single-family homes.

"Hopefully this shows that builders are working to construct more affordable housing, and that the median price will continue to drop," said Robert Frick, corporate economist at Navy Federal Credit Union. "Recent studies show half of prospective homebuyers can't afford a home above $300,000, so for the industry to engineer a strong revival it must build more affordably priced houses."