Desperate homebuilders slash prices by 6% to offset mortgage costs

U.S. homebuilders are slashing prices to offload unsold inventories of single-family homes—their latest desperate attempt to lure buyers back into the market.

The National Association of Home Builders’ (NAHB) housing market index fell by six points in November to 34, its lowest in almost a year. The index is down 22 points since July.

Anything below 50 indicates more pessimism in the market, with lower readings signifying worsening conditions.

A staggering 36% of builders told NAHB they cut home prices in November, with an average price reduction of 6%. Meanwhile, six out of ten builders provided some type of buyer incentive, such as free upgrades, discounts, and paying for closing costs.

These incentives carry an obvious financial burden for builders, who are sacrificing profit margins to boost sales.

“[H]igher short-term interest rates have increased the cost of financing for home builders and land developers, adding another headwind for housing supply in a market low on resale inventory,“ said NAHB Chair Alicia Huey.

While there’s some evidence that price cuts are working to boost sales, the reality is much more complicated.

New home sales rise, but not for the reason you think

According to the latest available data from the Commerce Department, new home sales rebounded 12.3% in September to an annual rate of 759,000 units—more than offsetting August’s nearly 9% drop.

Price cuts “are doing more than just grabbing buyers’ attention; they're making homeownership a reality for many who might have been left out in the cold given the current market conditions,” said Dan Hnatkovskyy, co-founder and CEO of real estate marketplace NewHomesMate.

But price cuts aren’t the only thing working in favor of new builds. A lack of supply of existing homes, which account for roughly 88% of the housing market, is driving more potential buyers to new construction projects.

Buyers are “frustrated by the lack of options” in existing homes and are increasingly considering new builds, according to Danielle Hale, chief economist at Realtor.com.

Odeta Kushi, deputy chief economist at First American, agrees. “Builders are benefitting from the lack of resale inventory,” she said.

“From 2000 until the pandemic, new homes, on average, made up about 11% of total inventory,” Kushi said. By July, new homes accounted for a staggering 31% of the total housing inventory.

Mortgage rates hold the key

Financial incentives and price cuts only work so far to recharge the housing market. According to experts, the housing recovery largely hinges on mortgage rates.

“When interest rates come down, everyone’s going to come back to the marketplace,” said Melissa Cohn, regional vice president of William Raveis Mortgage.

“In the next year or two years, interest rates will be lower, and people will have the ability to refinance,” she said.

Per Freddie Mac data, 30-year mortgage rates peaked at 7.79% in the week of Oct. 26, the highest in more than two decades. They’ve since pulled back to 7.44%.

There’s some evidence that mortgage rates may have peaked for now, with recent economic data lowering the odds of another Fed rate hike.