Wary builders fear new home buyers are being priced out

Builders fear that demand for new homes could be on the wane. As a result, they’re taking their foot off the gas in terms of production, wary that too many prospective buyers have been priced out of the market by rising costs.

In June, single-family home construction fell to its lowest level since April 2020, when the pandemic was just getting started, the Census Bureau reported this week. In addition, it said housing permits, which are a gauge of future home building activity, also declined.

The news follows an earlier report this week by John Burns Real Estate Consulting, which showed that builder sentiment had suffered its second-worst single month drop on record. Builders have raised concerns over slowing buyer traffic, that report said. As a result, around a quarter of builders are planning to reduce their prices to stir up more interest in their homes.

“Homebuilders have become extremely cautious about the prospect of single-family home sales,” said Lawrence Yun, chief economist at the National Association of Realtors. “There have been frequent reports of contract cancellations by buyers of newly constructed homes because they had signed a contract at the early stage of construction when mortgage rates were low. But as the completion of construction has taken longer, the home now requires finances at a much higher mortgage rate.”

Adding to the industry’s woes, new-home projects are facing significant delays because of supply chain disruptions. Many homes that were started several months ago have yet to be completed, Yun notes, adding that “homebuilders are waiting to see how these homes will sell before starting new construction.”

A bumpy road is likely to be ahead for the new-home market as housing affordability worsens. Only 10% of new homes sold for under $300,000 in May; the median sales price that same month was $449,000, census data shows. Further, costs are increasing for building materials, and lumber prices alone have added $14,345 to the average price of a single-family home since 2020, the National Association of Home Builders reports. Also, mortgage rates have nearly doubled in the past year, and monthly mortgage payments have climbed 51% in that time, according to NAR data.

“The softening of single-family construction data should send a strong signal to the Federal Reserve that tighter financial conditions are producing a housing downturn,” said NAHB Chief Economist Robert Dietz. “Price growth will slow significantly this year, but a housing deficit relative to demographic need will persist through this ongoing cyclical downturn.”