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New-Home Sales Up Nearly 25% as Builders Respond to Buyer Demand

Depending on what part of the country you live in, a new-construction home may be your best way to avoid the bidding wars of the existing-home market.

Home builders are taking orders. They are responding to market demand, driving new-home sales up 7.8% in February from January of this year, according to the Census Bureau and the Department of Housing and Urban Development. In fact, new-home sales increased nearly 25% from February 2014.

For the housing market, newly constructed homes spell relief. Nationally, there are too few homes available for sale to meet buyer demand. We’ve all read that inventories are low. The same is true in the new-homes market. The Census reported a 4.7-month supply of new homes at the current sales rate.

That’s why home prices have been rising faster than inflation, and faster than wages. The new-homes market has been largely absent from the housing recovery, because builders have been struggling to obtain construction loans, qualified labor, and expensive building materials. The fact that builders are taking more contracts for homes now than they have in the past says they are finally responding to market demand.

Builders are starting to tap into the first-time buyer market. The decline in the median new-home price—down to $275,000 in February from $294,300 in January, according to the report— is an indicator that builders are casting a wider net.

Volume of sales is up—more than 539,000 new homes were sold this February, up from 432,000 last February, according to the report. This bodes well for buyers who have been searching for a way to transition from renter to owner. However, buyers in the Midwest and Northeast may not have many new-home options.

Most new-home construction is concentrated in the southern and western parts of the country. In the South, 316,000 new homes were sold in February, up from 259,000 in February 2014, according to the report. Likewise, in the West, more than 126,000 new homes were sold last month, up significantly from 94,000 new-home sales the previous February.

There are reasons to doubt these numbers and reasons to be encouraged by them.

New-home sales are defined as contracts written. The downside is that contracts can fall apart. The upside is that buyers are willing to sign on the dotted line and wait months for a builder to create their dream home. And while housing permits and starts were disappointing recently, these numbers may indicate higher permit and start rates in the March release.

For those who can’t wait for a new home or who don’t have the option of a new-construction home in their area, prices of existing homes were up 0.3% in January, according to the Federal Housing Finance Agency Home Price Index, which calculates home sales prices from mortgages sold to Fannie Mae and Freddie Mac.

Prices were up more than 5% from January 2014 to January 2015, according to FHFA. In terms of the housing market recovery, that means homeowners are just 3.5% below the March 2007 peak and is roughly the same as the December 2005 index level. This means the worst of the housing crisis is in the rearview mirror. As prices continue to climb and interest rates follow suit, the housing market is returning to normal.

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