On Feb. 22, the experts at Zonda released the New Home Market Update report for January 2023.

There’s an interesting dynamic in the housing market where the improvement in demand seen so far in 2023 is celebrated by the homebuilding community but is carefully watched by policymakers trying to get inflation under control. The Federal Reserve is enacting restrictive policy to intentionally slow the overheated economy, and the housing market is a core part of that.

So far, the majority of builders report a stronger than expected start to the year. There are pockets of outperformance where some communities are exceeding sales seen at the beginning of last year, but the majority remain well below the feverish levels seen in 2021 and early 2022.

This uptick in demand is captured in Zonda’s New Home Pending Sales Index for January. The PSI was down 5.8 percent month-over-month when seasonally adjusted but up 4.3 percent when non-seasonally adjusted. Put simply, this is telling us that sales rose nationally in January but not to the same extent as would be expected given the time of year.

“It has felt like we’ve experienced data whiplash over the past few months as new economic and housing stats have been released,” said Ali Wolf, Zonda’s chief economist. “It’s hard to see the uncertainty clearing anytime soon, so we recommend going back to the basics of understanding market resilience, local supply and demand dynamics, and consumer preferences to guide future developments.”

Sales activity ticked up but less than the traditional seasonal improvement

Zonda’s new home sales metric counts the number of new home contract sales each month and accounts for both cancellations and seasonality. This metric shows there were 498,214 new homes sold in January on a seasonally adjusted annualized rate. This was a decline of 6.1 percent from last month and a drop of 37.5 percent from a year ago. On a non-seasonally adjusted basis, 40,112 homes were sold, 39.5 percent lower than last year but up 2.1 percent from December 2022.

Some markets appear to have stabilized

Total volume is down due to both supply and demand. Zonda’s New Home Pending Sales Index was created to help account for fluctuations in supply by combining both total sales volume with the average sales rate per month per community. The January PSI came in at 90.6, representing a 43 percent decline from the same month last year. The index is currently 48 percent below cycle highs. On a month-over-month basis, seasonally adjusted new home sales decreased by 5.8 percent. Similar to total volume, the PSI ticked up on an unadjusted basis, climbing 4.3 percent from December 2022.

• The PSI failed to grow in any of the select markets year-over-year, but Baltimore was again the strongest performer.
• The metros that performed the worst year-over-year were Phoenix (-64.4 percent), Las Vegas (-62.9 percent) and Denver (-62.8 percent).
• On a monthly basis, Cincinnati; San Antonio; and Austin, Texas, were the best performing metros. Cincinnati increased 0.7 percent relative to last month, while San Antonio and Austin were down 0.3 percent and 1.5 percent, respectively. Note, these percentages are seasonally adjusted.

Home prices continue to decelerate

National home prices increased year-over-year across entry-level, move-up and high-end homes. Prices rose 8.4 percent for entry-level to $336,943, 8 percent for move-up to $526,718, and 7.3 percent for high-end homes to $904,410.

Supplementing the data with a monthly survey Zonda conducts, the majority of builders reported holding their prices flat month-over-month from December to January. Roughly 32 percent of builders lowered prices and 12 percent increased them. The latter is a divergence from recent trends, and Zonda will be watching the direction of price changes throughout the year to get a sense of supply and demand and pricing power.

Incentives are still common in today’s housing market given the lower levels of sales. 57.6 percent of active projects are offering to-be-built incentives, up from last month. The average incentive dollar amount is $13,697, or 4 percent of the list price.

Total community count is nearly 30 percent below pre-pandemic levels

There are currently 13,412 actively selling communities tracked by Zonda, down 6.4 percent from last year. On a month-over-month basis, the national figure slipped 1.9 percent. Total community count is 29.8 percent below the same month in 2019. Zonda defines a community as anywhere where five or more units are for sale.

• Riverside/San Bernardino, California (+17.9 percent); Phoenix (+10.4 percent) and Los Angeles/OC (+9.3 percent) grew community count the most year-over-year.
• Relative to last year, the biggest community count declines were seen in Baltimore (-21.1 percent), New York (-20.3 percent) and Atlanta (-19.4 percent).
• Community count in none of the select markets rose month-over-month, 4 percent were flat, and 96 percent fell.

National quick move-ins totaled 29,084, up 203.9 percent compared to last year but 11.7 percent lower month-over-month. Total QMIs are 39.3 percent above 2019 levels. QMIs are homes that can likely be occupied within 90 days.

In many cases, builders were willing and able to offer more aggressive price cuts and/or incentives to help sell these homes, and the month-over-month drop captures the effectiveness.

Zonda’s survey of builders in January found that nearly 60 percent of builders were either somewhat comfortable or comfortable with their QMI levels, while 37 percent were somewhat uncomfortable or uncomfortable. The balance said they didn’t have any QMIs.

• On a metro basis, all of Zonda’s select markets increased QMI count year-over-year.
• The markets posting the biggest gains year-over-year were Phoenix; Tampa, Florida; and Riverside/San Bernardino. All three markets have seen QMIs rise 400+ percent YOY. Month-over-month QMIs were 1 percent lower in Phoenix and down 24 percent in Tampa and Riverside/San Bernardino.
• Jacksonville, Florida; Phoenix; and Sacramento, California, have seen the most growth in QMIs compared to the same time in 2019, up 353.6 percent, 211.7 percent, and 143.4 percent, respectively.

Methodology

The Zonda New Home Pending Sales Index is built on proprietary, industry-leading data that covers 60 percent of the production new home market across the United States. Reported number of new home pending contracts are gathered and analyzed each month. Released on the 15th business day of each month, the New Home PSI is a leading indicator of housing demand compared to closings because it is based on the number of signed contracts at a new home community. Zonda monitors 18,000 active communities in the country and the homes tracked can be in any stage of construction.

The new home market represents roughly 10 percent of all transactions, allowing little movements in supply to cause outsized swings in market activity. As a result, the New Home PSI blends the cumulative sales of activity of recently sold-out projects with the average sales rate per community, which adjusts for fluctuations in supply. Furthermore, the New Home PSI is seasonally adjusted based on each market’s specific seasonality, outliers are removed, and June 2016 is used as the base month. The foundation of the index is a monthly survey conducted by Zonda. It is necessary to monitor both new and existing home sales to establish an accurate picture of the relative health of the residential real estate market.