Homebuilders are falling over themselves to lure buyers

The sale of newly built homes surged in September, reaching the highest level since February 2022, thanks in part to some crafty incentives from homebuilders.

According to the Census Bureau, purchases increased by 12.3% to a 759,000 annualized pace last month—far exceeding analysts’ expectations. The sales pace was up 33.9% compared to one year ago.

The average sales price was $418,800, lower than the peak but still much higher than pre-pandemic levels.

While the numbers are encouraging at the surface, they mask the growing financial burden homebuilders face when trying to offload new properties.

Pulling out all the stops

Homebuilders are pulling out all the stops to lure mortgage-weary buyers back into the market. According to the National Association of Home Builders (NAHB), 62% of builders are offering some type of buyer incentive.

Those include anything from paying for closing costs, free upgrades and discounts to special financing opportunities.

This normally wouldn’t be a problem, except that these generous incentives are being offered at a time when construction and financing costs are surging.

“Higher rates are [...] Increasing the cost and availability of builder development and construction loans, which harms supply and contributes to lower housing affordability,” said NAHB chair Alicia Huey.

Most people associate higher interest rates with mortgages, but homebuilders also need loans to finance their builds. When rates rise, builders also feel the pinch.

“As interest rates increase, the cost of financing for acquiring land, developing building lots, and the construction loans for builders, all of those increase,” explains NAHB chief economist Robert Dietz.

The other factor propelling new home sales

It’s not just incentives that lure people to new builds. Some determined buyers are frustrated with the lack of available homes on the market.

“[H]ome shoppers frustrated by the lack of options might consider looking at new homes rather than existing homes,” said Danielle Hale, chief economist at Realtor.com.

And that's exactly what's happening.

New homes usually comprise around one-tenth of the total housing supply, but Hale said the number is growing. “New home sales are close to the highest share of the market that they’ve been in probably more than a decade,” she said.

Buyer frustration in the housing market was on display last month as existing home sales fell by 2% from August and a whopping 15.4% from a year ago.

While much of the decline was attributed to affordability challenges, a lack of supply is making the problem worse.

According to the National Association of Realtors, housing inventory last year fell to the lowest level since 1999. While supply is improving, it remains well below the levels needed to alleviate the housing shortage and prevent prices from getting out of hand.