Prices of newly built homes are on the rise again, illustrating that home builders are grappling with the same supply-and-demand problems bedeviling the existing home market. Two reports released this week indicate that new-home prices, which appeared to lose momentum over the past year, actually have caught a second wind of late. First, new Commerce Department figures show that, after four consecutive months of slight declines, the median price of a newly built home in the U.S. rebounded by 4.1% in April to $297,300. That puts it back within striking distance of the all-time high of $302,700 set last November. Next, upscale home builder Toll Brothers Inc. said as part of its earnings report for its quarter ended April 30 that the average price of homes it contracted to sell in the quarter increased by a heady 13.3% from a year earlier to $826,000. It marks Toll’s largest year-over-year gain since early 2014.
What gives? Some economists say demand simply is exceeding the pace at which builders can construct homes. Consider that builders have started construction of 7.6% more single-family homes in the first four months of this year than at the same time last year, according to Commerce Department data. Meanwhile, they’ve sold far more – 23.7% more, in fact — than a year ago. Sure, some of those homes sold so far this year are speculative homes built at the end of last year. But others just haven’t gone under construction yet. Once builders get threatened with falling behind schedule, many opt to raise prices in a bid to temper demand. “There just aren’t a lot of homes out there for sale,” said Mark Zandi, chief economist for Moody’s Analytics. “The market looks like it’s going to get even tighter because the level of construction remains very low compared to improving demand. I sense that, until builders can start ramping things up more significantly, pricing is going to be strong.” The squeeze is just as tight, if not tighter, in the resale market. The inventory level had held at about 4.6 months in the first quarter before rising to 5.3 months in April, meaning it would take that long at the current selling pace to burn through the available inventory of existing homes for sale. A balanced market, in which buyers and sellers are on roughly equal footing, is typically 6 to 7 months of supply. The result of that tight inventory is an increase in prices close to the all-time high set nine years ago. In April, the median resale price reached $219,400, up 8.9% from April 2014. That increase likely will help to create more supply by pushing up home values and thus fattening homeowners’ equity cushions. But it has a downside in that it makes buying a home more expensive, especially for first-time and entry-level buyers. At Toll, the explanation for rising prices is rooted in supply and demand, but it includes more than that. The Horsham, Pa.-based builder is selling more homes in high-priced California this year after buying developer Shapell Industries LLC there last year. In addition, Toll’s City Living division sold several luxury condominiums in a few of its complexes last quarter. Such condo sales tend to come in bunches and can skew Toll’s price averages upward. Still, Toll’s rising prices are a conscious decision made to ration its supply of land and labor. Chairman Bob Toll explained on a conference call with analysts Wednesday that the builder is equipped to construct up to 30 homes per year in each of its communities. If it sells more than that in a year, it gets too far ahead of its production schedule. “When you hit that 31st sale, you are now selling to the next guy for delivery 12-plus months out,” Mr. Toll said. “And you say to yourself, ‘Self, do I know what is going to happen 13 months from now? Maybe we better choke this sales pace back a bit.’ That gets you an increase in price, which slackens demand just because it may be overreaching.” This article was originally published on The Wall Street Journal
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