Homebuilders are increasing incentives just as they did before the COVID-19 pandemic to entice potential buyers of newly constructed homes amid slowing sales.
These factors include rising mortgage rates, increased pricing and shifting consumer perception.
What Happened: Data from John Burns Real Estate Consulting's Director of Research Rick Palacios confirmed on Thursday that nearly 70% of homebuilders the company spoke with were providing some kind of incentive to buyers in backlog, with 17% providing incentives as high as between 76% and 100%, putting pressure on homebuilders' margins.
Residential housing units subject to existing purchase agreements, but were not expected to close as of or before the closing date, are referred to as backlog units.
“Ton of homes in backlog waiting to close still due to stretched build cycles,” Palacios said on Twitter. “Construction costs have yet to decline and lion's share of homes in backlog reflect still elevated build costs, but now having to adjust lower on implied average sales price, thus margin squeeze.”
By proposing to cover closing costs, Scottsdale, Arizona-based Taylor Morrison Home Corp TMHC offered discounts for buyers of a new Houston home ranging from $18,000 to $50,000.
Depending on the neighborhood, Tri Pointe Homes In. TPH, a California-based homebuilder, offered mortgage rate buydowns among other incentives at its Houston branch.
Why It Matters: Homebuilders might not prefer providing incentives in order to compete, but it is an indication that the market is headed in an unsustainable direction.
Due to the persistently low supply of existing homes, prices are stubbornly high. Construction accelerated with the support of the homebuilders but has abruptly changed with lower demand that stemmed from high-interest rates.
“This may just be the beginning of a difficult stretch for the homebuilding industry,” said Nicole Bachaud, an economist with Zillow.
Sales would be limited in the short term by slowing construction permits and starts activity, which indicates that builders are preparing for a more difficult road ahead, even while the housing market is still eager for additional inventory and long-term demand isn't changing.
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