How Homebuilders Are Responding to the Market

There was a great article in the DBJ last week about how homebuilders have been impacted this year and how they are responding. The new home market is even more interest rate sensitive than the existing home sale market. Here are some highlights—

· In June about 60k new home purchase contracts cancelled or fell through or about 14.9% of all contracts signed in June. This rate was 11.2% in June 2021. But, 15% is a normal cancellation rate.
· DR Horton said their cancellation rate last quarter was 24% which they consider normal and they have been able to resell their cancellations. I don’t know for how long they can do this though.
· Some strong positive factors for home building include a strong jobs market, demographic trends and tight rental supply.
· Homebuilders have increased incentives such as offering longer locks and temporary interest rate buydowns. Builders expect incentives to increase and will soon include discounts on options and lot premiums.
· Pulte is increasing their share of building spec homes to roughly 30% of all sales. WOW! That’s gutsy!

In a second article from Bloomberg I read that buyer traffic to homebuilder websites and sales offices have plunged to their lowest levels since 2012. Buying down rates is many builders’ #1 incentive. Third builders are quickly reducing their new starts and permits. This is the last thing we need as we have a housing supply crisis and we have HUGE housing demand for the next 18 years with 4 million or more young adults turning 33 every year for the next 18 years. Reduced new home supply will also keep home prices on new and existing homes high.