Desperate homebuilders are slashing prices to boost sales

U.S. homebuilders are feeling the anxiety of a lack of homebuyer demand, and are resorting to desperate measures to entice buyers.

According to the National Association of Home Builders (NAHB), builder confidence slipped to its lowest level of the year in August. Market conditions are so bad that a whopping 33% of builders slashed prices—the highest share of the year.

The share of builders offering lucrative sales incentives grew to 64%, the highest level since April 2019.

Builders are responding to a drop in “both present sales and traffic” as buyers remain sidelined by “challenging housing affordability conditions,” according to NAHB chairman Carl Harris. Conditions have only worsened during what’s typically described as peak buying season.

“The only sustainable way to effectively tame high housing costs is to implement policies that allow builders to construct more attainable, affordable housing,” Harris said.

NAHB’s latest data was collected just before the recent drop in mortgage rates. The organization’s chief economist, Robert Dietz, said there’s reason to be hopeful that declining rates will lure buyers back to the market.

“With current inflation data pointing to interest rate cuts from the Federal Reserve and mortgage rates down markedly in the second week of August, buyer interest and builder sentiment should improve in the months ahead,” he said.

Despite Dietz’s optimism, not everyone is convinced that rate cuts will be the tide that lifts all ships.

Housing affordability remains a chronic issue

Expectations that the Fed will begin lowering interest rates next month have triggered a sharp drop in bond yields. Mortgage rates have followed suit, with 30-year rates falling to the lowest level in 15 months.

But even with the most recent drop, 30-year fixed-rate mortgages averaged 6.49% for the week ending Aug. 15, according to Freddie Mac. This is still too rich for most Americans to afford.

Moody’s economist Nick Villa thinks mortgage rates need to fall below 5.25% before housing conditions improve. At this level, existing homeowners would feel more comfortable selling homes they financed at dirt-cheap mortgage rates, and first-time buyers would have more confidence in managing monthly expenses.

The problem is that, based on recent forecasts by Freddie Mac and Fannie Mae, 5% mortgages could still be over a year away.

The deputy chief economist of the Mortgage Bankers Association, Joel Ken, also observed that the recent downward movement in rates has only resulted in “small gains” in home sales, implying that lower rates are needed to attract buyers.

The other part of the affordability challenge is elevated home prices. Despite a lack of buying demand, low housing supply has pushed up prices to record highs. Economists at Goldman Sachs expect home values to continue trekking higher this year and next year.

According to the investment bank, home prices will rise 4.5% in 2024 and 4.4% in 2025. Both estimates are higher than previous forecasts.