The new-home sector’s capture of market share from the existing-home market is contributing to a stabilization in business conditions for the home building sector, according to a report from Moody’s Investors Service.

New-home demand turned positive in the second quarter following a two-year period of year-over-year declines.

“Homeowners reluctance to sell because of declining year-over-year home prices and high mortgage rates means there is lower supply in the existing-home market, providing an opportunity for home builders,” says Natalia Gluschuk, vice president and senior credit officer at Moody’s Investors Service.

According to Moody’s, new-home sales represented 14% to 15% of total transaction volume over the last three quarters, compared with 11% to 13% during the seven prior quarters. During the period following the Global Financial Crisis until the pandemic in 2020, new-home sales averaged 10% of total transaction volume.

According to Moody’s, the improvement in demand conditions reflect the perception that interest rates will not fall back to low levels in the short-term future. An additional indicator of stabilization in the sector is the normalization of cancellation rates. After spiking to 30% in the fourth quarter of 2022, median cancellations rates returned to approximately 15% during the first half of 2023.

Mortgage rate buydowns and price cuts in the new-home market continue to make new builds an attractive option for affordability-conscious buyers. Moody’s projects new-home prices will decline 10% in 2023 and further decline by 4% in 2024.

In part due to shifting new-home/existing-home market share, Moody’s projects national new-home sales to rise 7% to approximately 686,000 homes, with a further increase toward 720,000 homes in 2024. Moody’s forecasts new single-family starts will decline 10% in 2023 to 905,000 homes before growing 5% to 950,000 in 2024. The group noted the general shift from home builders toward more speculative homes in order to meet the demand for quick-closing homes.

“This shift is not cause for concern as it remains only a modest adjustment in activity and not a major strategy shift for each builder, and the demand for quick-closing homes is likely to remain solid,” Moody’s wrote in its September housing sector report. “We believe home builders would shift back to their typical strategies if demand diverts away from available for quick-closing homes and as production cycles gradually shorten toward typical levels experienced before the pandemic.”

Moving forward, homeownership and demand conditions will also be supported by a healthy employment landscape, favorable demographic trends, and the lack of housing overbuild during the decade, according to Moody’s.

Moody’s identified affordability constraints—including rising interest rates and home prices—as the main risk to the demand conditions in the housing sector. Moody’s Macroeconomic Board forecasts interest rates will enter a period of volatility and risk remaining higher for longer, potentially impacting entry-level buyers most significantly.