On the edges of US Sun Belt suburbia, the wait lists for new houses are gone. And homebuilders are doing something they haven’t done in years: slashing prices.
The fastest-rising mortgage rates in decades have cooled demand so abruptly in many hotspots that it took the industry by surprise. Builders that were artificially limiting sales and auctioning houses to the highest bidder now have inventory to move.
In the Austin, Texas, and Nashville, Tennessee, metro areas, for instance, the share of new-construction offerings with price cuts has quadrupled from a year earlier, according to Redfin Corp. They tripled in Phoenix and doubled in the Tampa, Florida, region.
“We are in a different place — the builder can no longer name a price and say, ‘pay it or move along,” said Nicole Freer, a Houston agent who has slashed prices by $2,000 to $20,000 on homes she lists for builders. “They’re telling us: ‘Our managers have allowed us to negotiate again.’”
It’s part of a rapid shift in the US housing market as the Federal Reserve sharply raises interest rates to tame inflation, sending home-loan costs to the highest level since 2008 and straining buyers whose affordability limits were already being tested. Just this week, brokerages Compass Inc. and Redfin said they would slash jobs, while economic data showed housing starts dropped to the lowest level in more than a year and homebuilder sentiment is at a two-year low.
Share prices for builders have been battered on expectations of a slowdown, with the S&P Supercomposite Homebuilding Index tumbling 42% this year through yesterday, more than the 23% drop in the S&P 500.
Builders, who last year had so much power that people would wait in line overnight for homes they would meter out, are now contending with both falling demand and high material and labor costs. And with the Fed signaling more big rate hikes in coming months, they’re eager to get contracts signed before house hunters pull back even more.
In Sarasota, Florida, would-be buyers are hesitating because homes are taking so long to build, and it’s impossible to know where borrowing costs will land by the time they’re completed, said Donnette Herring, a Realtor with Keller Williams.
“Inflation makes them nervous,” Herring said.
Discounting is a strategy the industry prefers to avoid. Like two gas stations lowering prices on the same side of the street, it can lead builders on a downward spiral at their communities, threatening margins. It can also anger customers who have already signed contracts at higher prices.
The signs of a shift are still early. Conditions vary from region to region and even between subdivisions, including many where demand still far outpaces supply. And rather than cutting prices, many builders are offering incentives such as free upgrades, money toward closing costs and subsidized mortgage rates.
But the market is changing fast, said Ali Wolf, chief economist at Zonda. Her company, which tracks new construction, began hearing of price cuts toward the end of May and into June.
“The builders that are cutting prices are also those that raised prices the most over the past six to 12 months,” she said.
Many of those are in areas that were favored destinations for pandemic migrants who have been moving from pricey regions in search of cheaper homes and more space. In the Phoenix metropolitan area, 22% of new-home listings had price cuts from May 9 through June 5, up from 7% a year earlier, according to data from Redfin. In Tampa, the share jumped to 21% from 9% a year earlier, and in Austin, it climbed to 13% from just 3%.
The cuts have come from both small private builders and big public ones, including D.R. Horton Inc., Meritage Homes Corp. and Lennar Corp., according to listings in Florida, Texas and Arizona publicly available on sites such as Redfin and Realtor.com. Meritage declined to comment, while D.R. Horton didn’t respond to messages seeking comment. Lennar said it couldn’t comment ahead of its earnings report next week.
A PulteGroup Inc. website shows 146 finished homes in Arizona, mostly with price reductions. Jim Zeumer, vice president of investor relations, said those appeared to be typical incentives used to sell spec houses — those built without a buyer in place — that are complete or will be finished soon.
“We will typically have one or two finished specs in a community but use incentives to manage inventory levels over the life of a community,” Zeumer said.
During the recent boom, many builders were waiting until homes were nearing completion before allowing buyers to purchase them because of uncertainty around materials and labor costs. As a result, they have a flood of new homes that need to be matched up with buyers.
In the Houston region, it’s the fast-growing areas further from the city, such as Conroe to the north and Alvin to the south, that are cooling the most, said Freer, the local agent. Builders who were only selling homes that were almost done now are telling her that they’ll take orders for “dirt.”
Of her roughly 120 listings for builders, about 70% now have cuts, she said.
The Dallas area has a record of more than 41,500 homes under construction, a 10.7-month supply at the current sales pace, about twice the normal level, said Ted Wilson, principal at local industry consultant, Residential Strategies Inc. The pipeline has expanded because of construction delays caused by supply chain snarls and the labor shortage, along with the surge in starts early this year, he said.
Builders that had been raising prices “are having to dial that back,” Wilson said, while pointing out that they still have high margins baked in from the boom years. “This is not a distressed situation.”
A key metric to watch is the contract cancellation rate, said Rick Palacios, research director at John Burns Real Estate Consulting in Irvine, California. It topped 9% nationally in May, according to his company’s survey of builders, up from 6.6% in April. That’s still short of the 16% pace after the pandemic lockdowns first took hold two years ago.
“The writing is on the wall that more supply is coming, no matter how you slice and dice the data,” Palacios said. “Builders are trying to get in front of that wave. We could have the double-whammy of the economy cooling and a lot of supply coming on. That’s not the best recipe to sell homes.”
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