Persistently low single-family for-sale housing inventory has been the housing market’s most significant challenge for years. With not enough resale homes available for sale, the new home industry has had to increase building, despite elevated mortgage rates.

Per Freddie Mac, mortgage rates in May averaged 7.06%, the highest monthly average since last November. Consequently, sales of newly built, single-family homes fell 11.3% to a 619,000 seasonally adjusted annual rate in May. New single-family home inventory increased 1.5% in May to a level of 481,000, up 12.9% compared to a year earlier. This represents a 9.3-month supply at the current building pace.

Some analysts have suggested that the market for new single-family homes is possibly oversupplied — given the benchmark for a balanced housing market is a five- to six-month supply — implying declines for construction and prices lie ahead. However, the current inventory of existing single-family homes is a mere 3.6-month supply. This lack of inventory has produced ongoing price increases despite significantly higher interest rates over the last two years.

Taken together, new and existing single-family home inventory currently sits at just a 4.4-month supply. And NAHB analysis indicates that sustained construction declines become more likely than not when this total measure increases above six. Price declines become more likely than not at a measure of eight. Given supply remains lean and interest rate declines are expected in the quarters ahead, the market is in a weakened position, but one with the possibility of expansion ahead.

Due to declines in new home size and some builder use of incentives, the median price of new homes fell to $417,400 in May, down almost 1% from a year ago. Reflecting the lean inventory noted above, resale pricing remains solid. On a year-over-year basis, the Case-Shiller Home Price Index posted a 6.29% annual gain in April, following a 6.52% increase in March. There have only been two months of year-over-year declines (April and May 2023) during this interest rate cycle.

Until the Fed signals that short-term interest rates are moving lower (NAHB is forecasting this will occur in December), housing demand may be stuck in a short-term holding pattern. Some slowing of price growth is expected during this time.