Just a few months ago, builders couldn’t put homes up fast enough to appease the hordes of eager buyers. They boasted about lengthy waitlists, even holding lotteries to choose those lucky enough to purchase their newly constructed homes.

Those days are now over as the housing market corrects after two years of runaway prices.

Buyers are now canceling orders and extracting themselves from waitlists as higher mortgage rates have pushed their dreams of owning new construction beyond their financial reach. Sales are down.

Builders are responding by throwing out incentives, like spaghetti against a wall, to see which ones attract buyers. Some have begun cutting prices, and the majority are slowing down the pace of construction—despite the nation’s dire housing shortage that’s hit crisis proportions.

“We should anticipate fewer homes being built over the next 12 months,” says Ali Wolf, chief economist of Zonda, a real estate consultancy. “The new-home market is struggling right now. Demand has cooled more than you would imagine this time of year.”

Many buyers were already reeling from record-high home prices. Add in higher mortgage rates, and suddenly many were unable to afford the monthly payments on a new home, which are often more expensive than older properties. And with the housing market softening, some would-be buyers have decided to sit tight for now to see if they can get a better deal down the line.

“You raise rates to this level, and you’re going to have folks who can’t qualify” for mortgages, says Devyn Bachman, senior vice president of research at John Burns Real Estate Consulting. “There is a very large group of buyers who could buy but are choosing not to because they’re worried about a recession, inflation, and the national economy. People are afraid they’re going to buy a home and a year from now it will be worth less than it is today.”

In June, there was a roughly 31% decline in sales in new-home developments compared with the same time a year ago, according to data from John Burns. The number of sales fell even further in July, according to preliminary data.

That’s given builders pause. They don’t want to put up the money to construct homes if they’re not confident they can sell them.

“Without a doubt, the first half of 2022 qualifies as a housing recession,” says Robert Dietz, chief economist of the National Association of Home Builders. “Homebuilding’s going to contract. It’s kind of a reset.”

What’s happening with new home construction

What’s worrisome is that in May, builders began noticeably pulling back on the number of permits they applied for to put up new homes, according to U.S. Census Bureau and U.S. Department of Housing and Urban Development data. Housing starts, which are homes builders have begun construction on but haven’t yet completed, also fell in May.

“Building had a big drop-off,” says Realtor.com® Chief Economist Danielle Hale. “Unfortunately, with this pullback in building, that shortage is unlikely to be solved anytime soon.”

Roughly 87% of builders are now planning to slow down their pace of construction, according to Zonda. They want to make sure they can sell whatever they build before they pour a lot of money into new projects.

“Builders are saying, ‘We’re going to wait and see how the market progresses,'” says Wolf.

Bachman expects builders to take out 5% to 10% fewer permits to put up new homes next year. That’s problematic—but not catastrophic.

The largest homebuilder in the nation, D.R. Horton, reported that about 24% of orders for new homes were canceled from April through June, according to its most recent earnings report. Orders for new homes fell 7%. (Last year during the same period, about 17% of all orders were canceled.)

PulteGroup, the third-biggest homebuilder, reported cancellations were up to 15% in the second quarter of the year—compared with 7% a year earlier. Orders for new homes dropped 23% from a year ago.

“We are seeing increased cancellations, which is an early sign of distress in the new-home market,” says Bachman.

Lennar bucked the trend, reporting orders for new homes were up 4% year over year in the second quarter of the year. However, the second-largest builder in the country wasn’t immune to the turbulence in the housing market.

“The weight of a rapid doubling of interest rates over six months, together with accelerated price appreciation, began to drive buyers in many markets to pause and reconsider,” Lennar’s Executive Chairman Stuart Miller said in a statement in Lennar’s most recent earnings report.

Homebuilders are now wooing prospective buyers

In a sharp shift from earlier this year, homebuilders are now wooing prospective buyers with a slate of incentives.

These perks vary by builder, but they can include companies offering to buy down mortgage rates so that their customers have lower rates, shouldering some of the closing costs buyers are traditionally responsible for, offering fancier finishes and amenities, and ending the premiums they charge for corner lots and other locations with views. About 20% have cut prices, which many builders view as a last resort.

In some cases, they’ll go back to the drawing board and see if they can rework projects to put up more affordably priced homes. That could be erecting smaller homes, scrapping single-family developments in favor of more condos and townhomes, or using less expensive finishes in an effort to get costs down. Smaller homes often cost less in materials, labor, and time to produce.

Where builders are most likely to hit the pause button

New home construction could dip the most in some of the housing markets that got the most overheated during the COVID-19 pandemic. These are the kinds of places that are already correcting, with home sellers in many of them being forced to cut prices to woo buyers.

Building is expected to slow the most in the Pacific Northwest, Northern California, the Southwest, and Texas, says Bachman of John Burns. Metropolitan areas like Boise, IDAustin, TXPhoenix; and Salt Lake City are slowing the most, she says. Priced-out buyers and those worried about buying at the peak of the market are dropping like flies.

Bachman also expects construction to slow more in smaller real estate markets that have become cheaper alternatives to big cities—like Colorado Springs, CO (compared with Denver), and Boise, ID (compared with Seattle).

“They’ve seen a very rapid pullback in demand,” says Bachman.

Source: Realtor.com

Posted by Grossman & Jones Group on


Email Send a link to post via Email

Leave A Comment

e.g. yourwebsitename.com
Please note that your email address is kept private upon posting.