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April 23, 2021, 3:34 p.m. EDT

New home sales surge past expectations as builders race to meet demand

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Jacob Passy

The numbers: New home sales occurred at a seasonally-adjusted annual rate of 1.021 million in March, the U.S. Census Bureau  reported Thursday . It represented the fastest pace of new home sales since 2006.

Month-over-month, sales rose 20.7%, and compared with March 2020, sales more than doubled. Additionally, the U.S. Census Bureau revised the sales figure for February up to a rate of 846,000, from the originally reported rate of 775,000.

The median forecast of economists polled by MarketWatch was 888,000.

What happened: Sales rates increased in every part of the country except the West, where they fell 30%. The largest sales gain occurred in the South, with a 40% jump.

Unlike the existing-home sales report, the new-home sales report from the Census Bureau captures sales when the contract is signed rather than when the sale is closed. As a result, March’s numbers likely were not influenced much by the poor weather in February. Parts of the South saw an extended, record cold snap that stalled much business activity throughout the region.

The number of new homes for sale at the end of March remained unchanged from the month prior, but was down 7% from a year ago. However, when the rate of sales is taken into account, the inventory in March only equated to a 3.6-month supply, down from a 4.4-month supply the month before.

The big picture: To borrow the famous line from “Field of Dreams,” if you build it, they will come. In today’s housing market, home builders continue to see elevated demand, in large part because buyers are very much struggling to find existing-homes to purchase.

Years of under-building has caught up with the U.S. Now, the country has a serious shortage of homes — as many as 4 million, according to Freddie Mac — to meet the demand from buyers.

Millennials have hit the point in life where buying a home becomes very attractive, and the pandemic has caused people to rethink their living situations. All of which is to say that demand in this market is organic, according to economists, and not fueled by risky lending practices.

Builders, for their part, are having enough trouble keeping up with demand in the marketplace already that they aren’t engaging in speculative construction. Of the new homes sold in March, only about a quarter of them had already been constructed — most were instead under construction or not yet started. A year ago, over 40% of the new homes sold were completed.

Still, there are some headwinds for the market. While mortgage rates have fallen in April thus far, if they begin to rise again in the future that could constrain buyers’ interest in pricier new homes. Plus, builders are struggling with shortages of supplies and appliances, driving up the cost to complete homes.

What they’re saying: “Supply is the biggest limiting factor in home sales. The is a 2.1 month’s supply of existing homes at the current sales rate, which is up from an all-time low of 1.9 months last December,” Chris Low, chief economist at FHN Financial, said in a research note ahead of the new-home sales report’s release.

“But the rise from the low is not because there are more homes for sale, it is because the sales pace slowed,” he added.

“While mortgage rates are a significant factor for home purchases, the biggest issue currently seems to be inventories, and it will continue to be a headwind in the near term,” Rubeela Farooqi, chief U.S. economist at High Frequency Economics, wrote in a research note.

Market reaction:  The Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA -0.92%  and S&P 500 index  /zigman2/quotes/210599714/realtime SPX -1.22% were both up slightly following the report’s release, while homebuilder stocks — including D.R. Horton /zigman2/quotes/202032328/composite DHI -3.63% ,  Lennar Corp. /zigman2/quotes/202536373/composite LEN -3.78%  and PulteGroup /zigman2/quotes/201694804/composite PHM -3.13%  — rose even higher in morning trading.

/zigman2/quotes/210598065/realtime
US : Dow Jones Global
33,953.17
-315.99 -0.92%
Volume: 119.12M
May 12, 2021 11:28a
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/zigman2/quotes/210599714/realtime
US : S&P US
4,101.60
-50.50 -1.22%
Volume: 716.86M
May 12, 2021 11:28a
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/zigman2/quotes/202032328/composite
US : U.S.: NYSE
$ 95.99
-3.61 -3.63%
Volume: 1.97M
May 12, 2021 11:27a
P/E Ratio
11.14
Dividend Yield
0.83%
Market Cap
$35.90 billion
Rev. per Employee
$2.09M
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/zigman2/quotes/202536373/composite
US : U.S.: NYSE
$ 99.54
-3.91 -3.78%
Volume: 1.23M
May 12, 2021 11:28a
P/E Ratio
10.21
Dividend Yield
1.00%
Market Cap
$31.59 billion
Rev. per Employee
$2.37M
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/zigman2/quotes/201694804/composite
US : U.S.: NYSE
$ 57.68
-1.87 -3.13%
Volume: 893,834
May 12, 2021 11:28a
P/E Ratio
10.41
Dividend Yield
0.97%
Market Cap
$15.75 billion
Rev. per Employee
$2.10M
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