Pandemic or Inventory – What is Driving Relative Strength in New Home Sales?

Thursday, July 16, 2020 by Zelman & Associates

Filed under: existing home sales new home sales survey

In so many ways, COVID-19 has altered the way one might describe their home – a place to shelter, their office, a school room, a safe haven, and more. With that has come many opinions and surveys about how consumers are thinking about owning versus renting, urban locations versus the suburbs or expensive job centers versus more affordable submarkets. Unfortunately, many of these surveys often lack historical perspective and therefore offer limited predictive capabilities. Additionally, we have found that what consumers say and what they do often differ.

The Conference Board Consumer Confidence Survey has been conducted for decades and has always included several questions related to housing. Although the percentage of respondents that have stated that they plan to purchase a home in the subsequent six months overstated actual transaction activity by 15-20% from 2012-19, the survey provides interesting feedback regarding potential homebuyers’ preference for new construction versus existing homes.

For instance, in June, 34% of prospective homebuyers identified new construction as a preference over existing homes versus 24% in May and 36% in April. While choppy on a monthly basis, we note that the 2Q20 average at 32% was unchanged from 1Q20 and 2Q19, despite a perception that the consumer is opting toward new construction specifically for pandemic-related reasons, such as a clean environment, flexibility with floorplans or more square footage. Such a shift in sentiment does not show up in this data.

Instead, when analyzing quarterly data since 1Q14, we find a solid correlation between interest in new construction and the availability of existing home for-sale listings. For example, more recently the year-over-year increase in existing home listings peaked in 2Q19 at the same time that interest in new construction was bottoming. Since then, existing home inventory has contracted, aligning with the greater interest in new construction as potential buyers have become frustrated with their options.

In 2Q20, we estimate that orders for production single-family new construction homes will increase approximately 5-7% year over year while existing home contracts will decline closer to 15% versus the prior year. While this might appear to be contradictory, existing home for-sale listings were down about 20% in the quarter. Thus, on an inventory-adjusted basis, existing home demand would be up approximately 5%, roughly matching the new construction side of the equation. This would seem to question whether the relative strength of new construction is inventory related or pandemic driven. At this point, we believe the debate remains open, and will continue to track both sides of the market through our monthly Homebuilding and Real Estate Broker Surveys.

Pandemic or Inventory – What is Driving Relative Strength in New Home Sales?

Looking for More Insightful Content?