New home prices are in steep decline as builders rush to shed inventory

• New home prices are in a sharp fall as homebuilders are getting rid of their inventory.
• Sales of new homes have jumped 26% since July of last year.
• Pantheon Macroeconomics said the adjustment in home prices "is only just getting underway, with much further to run."

New home prices are in a steep decline as builders get rid of their inventory, according to Pantheon Macroeconomics senior economist Kieran Clancy.

That's in contrast with prices for existing homes, which have been relatively flat lately. The difference is that demand has shifted away from existing homes amid a lack of supply and toward new homes, which accounted for 15% of single-family home sales last month versus 11% a year ago, he said in a note Tuesday.

"Existing home prices have held broadly steady in recent months, but new home prices are falling rapidly as homebuilders seek to reduce their inventory overhand," Clancy said, pointing to the ample supply of new homes on the market.

As of April, builders had 7.6 months worth of new inventory, compared to just 2.9 months worth of existing home inventory.

With more supply available, new home sales are up 26% from their low in July 2022. The Commerce Department said Tuesday that April sales hit a 13-month high of 683,000, topping economists' expectations, with the median price dropping 8.2% from a year ago to $420,800.

"The monthly price data are far too noisy to take seriously, but the steep downward trend in numbers is clear," Clancy said. "The adjustment in home sales and construction activity to last year's collapse in demand is already largely complete – notwithstanding the ongoing compositional shift in sales towards new homes – but the adjustment in prices is only just getting underway, with much further to run."

The tight supply of existing homes comes as high mortgage rates discourage homeowners from listing their properties for sale. Experts say that's placed the existing home market in a deep-freeze, with buyers and sellers pushed to the sidelines as mortgage rates continue to hover around 7%.

But activity across the broader market could pick up if mortgage rates start to ease: Markets are expecting the Fed to dial back real interest rates in the economy in the second half of the year, which could influence a retreat in mortgage rates as well.

National Association of Realtors economist Nadia Evangelou told Insider that 2023 could be a turnaround year for the housing market, predicting housing activity could recover and jump around 18% in 2024.