The numbers make it clear. The new-home market – for many players in almost every U.S. geography – is in limbo.

Telling evidence of this – a data point from today's release of New Home Sales for May 2024 from the Census Bureau – is a full retrace back to pre-pandemic sales pace levels in 2019, and this picture here.

Here's Calculated Risk host Bill McBride's commentary on the Months' Supply figure:

The inventory of completed homes for sale (red) - at 99 thousand - is triple the record low of 31 thousand in February 2022. This is the most since 2009, but still close to the normal level of completed homes for sale.

The inventory of homes under construction (blue) at 278 thousand is very high but is about 13% below the cycle peak in July 2022. The inventory of homes not started is at 104 thousand - this is the all-time high."

It's big-boy pants time. Many operators believe that the moment interest rates start on a path downward new-home buyers will return in droves, igniting a fury of growth. But that moment may not come until the end of this year or later. The tension rises especially as operators expend resources and add costly debt to put a scenario of volume growth into the mix for 2025 and beyond.

Waiting for that growth to pronounce itself – with all the volatility and uncertainty hovering on the horizon – adds stress and anxiety to forward business planning. Homebuyers who have the luxury of time in greater numbers are choosing to sit out and wait for either home prices or interest rates, or both, to bend their way.

In the current market environment, the key metric of months' supply is significantly higher than the norm, indicating a potential cyclical downturn in demand for new homes. As of the May report, the months' supply stands at 9.3, well above the typical 6 months that signals a balanced market. This elevated supply-to-sales ratio means that every homebuilding operator must scrutinize their inventory status — whether completed, under construction, or not started, and reevaluate their market strategies to adapt to the changing conditions.

Given this scenario, builders must understand their own exposure to "overhang" inventory and be prepared to act swiftly. The downside, of course, is a hit to hard-earned operating margins. Still, first-movers in adjusting strategies often have greater control over their outcomes than those who react later. Builders need to rapidly determine their selling prices' "strike price" to initiate a cause-effect feedback loop that aligns with current market demands. This proactive approach is essential to avoid being stuck with unsold inventory if market demand weakens further before the Federal Reserve relaxes policies affecting the cost and availability of capital finance.

Key Takeaways from the Latest New Home Sales Report

1. Supply of New Homes:

• Current Situation: The report indicates a 9.3 months' supply of new homes, which includes completions, homes under construction, and not-started supply. This is significantly above the normal level of 6 months.
• Historical Context: The highest recorded months of supply was 12.2 in January 2009, while the lowest was 3.3 in August 2020. The current figure signals a potential cyclical downturn in demand for new homes.
• Strategic Implications: Builders should prepare for a potential slowdown in new home demand. This excess supply may pressure prices and sales volumes, requiring strategic adjustments such as increased marketing efforts, flexible pricing strategies, and enhanced buyer incentives.

2. Market Share Shift:

• There is an accelerating shift in market share from local and regional private homebuilders to public homebuilders, even as the overall market for new homes stabilizes.
• Public builders often have more robust financial resources and operational efficiencies, allowing them to better weather downturns and capture market share.
• Private builders focus on differentiating their offerings, emphasizing local market knowledge and personalized customer service. Collaborations or strategic partnerships could also help leverage resources and mitigate risks.

Perspectives

Robert Dietz, Chief Economist, NAHB:

• Market Influence: High mortgage rates (7.06% average in May) have dampened new home sales, which fell 11.3% from April and 16.5% from a year earlier.
• Inventory Insights: New single-family home inventory rose 1.5% in May to 481,000 units, representing a 9.3 months' supply. Combined with resale homes, the overall supply remains low at 4.4 months.
• Price Trends: Median new home prices fell to $417,400, a 1% decrease from last year, reflecting builders’ use of incentives and smaller home sizes.
• Regional Performance: Year-to-date, new home sales increased in the Northeast (6.0%), Midwest (25.2%), and West (6.3%), but declined in the South (-7.6%).

Bill McBride, Housing Economist, Calculated Risk:

• Sales Performance: New home sales in May were 619,000 SAAR, down from April's revised 698,000 and 16.5% below May 2023. Sales were well below the expected 650,000 SAAR.
• Supply Levels: The months of supply increased to 9.3 from 8.1 in April, well above the normal range of 4 to 6 months.
• Market Outlook: The revisions to previous months' data suggest that while May's sales were disappointing, there may still be underlying strength in earlier months' performance.

Carl E. Reichardt, Managing Director, BTIG:

Builder Sentiment: "May sales and traffic indicators inched slightly lower compared to April. 33% of respondents reported year-over-year increases in sales orders per community versus 35% last month and 34% in May 2023. 35% of builders reported an increase in year-over-year traffic at communities, and 26% saw a decline versus 38% and 25%, respectively, last month."

Pricing and Incentives: "Base pricing activity weakened in May from April; incentives were mixed with more builders both increasing and decreasing them. 32% of builders reported raising either 'most/all' or 'some' base prices, down from 40% last month, but 19% reported lowering 'most/all' or 'some' base prices versus just 7% in April 2024."

• Regional Variations: Markets in NC, SC, and WA were strong, while CO and MO were weak. FL showed mixed trends, and GA saw some improvement.

Strategic Recommendations

Amplify Opportunity:

• Market Differentiation: Emphasize unique selling points such as community features, sustainable building practices, and customer service excellence.
• Flexible Pricing Strategies: Adapt pricing strategies to local market conditions, leveraging incentives and promotions to attract buyers without eroding profitability.
• Leveraging Technology: Utilize digital tools for marketing, virtual tours, and customer engagement to enhance the buying experience and reach a broader audience.

Mitigate Risk:

• Inventory Management: Closely monitor inventory levels and adjust construction schedules to avoid oversupply. Consider focusing on completing and selling existing inventory before starting new projects.
• Financial Preparedness: Maintain strong financial reserves and access to credit to navigate potential downturns. Evaluate cost structures and identify areas for efficiency improvements.
• Partnerships and Collaborations: Explore partnerships with larger builders or other stakeholders to share resources and mitigate risks associated with market volatility.

Homebuilders face both challenges and opportunities. By staying agile and strategically focused, builders can navigate the cyclical or abbreviated downturn and position themselves for future growth as market conditions stabilize. Adapting to changing market dynamics, leveraging technology, and maintaining strong financial health will be critical for success in the coming months.