Builders Are Winning as Search-Weary US Buyers Rush to New Homes

In a US housing market warped by sharply higher interest rates, homebuilders possess what buyers crave: inventory.

It’s a welcome shift for the industry, which was in a slump as the year began. Now, buyers have begun flocking to builders’ sales offices, where offers of discounts and rate buy-downs are so generous that it’s often cheaper to buy new than pre-owned.

Traditional sellers, meanwhile, have become a rarity, as few homeowners are willing to move and relinquish their lower-rate loans. And with new listings on the decline, buyers are tired of just sifting through scraps.

Mortgage rates above 6%, up from around 3% in late 2021, have created a golden opportunity for builders big and small, at least in the short term. It’s a curious twist of post-pandemic economics giving a surprise lift to homebuilders’ stocks and their confidence, which is at the highest level since September, according to one measure.

“The homeowner is simply saying I’m going to sit this out, but the builders have stayed in the game,” said Taylor Marr, deputy chief economist at Redfin Corp. “They’re winning.”

Just as the key spring selling season was getting started, purchases of previously owned homes tumbled nearly 25% last month compared with the previous March, a Redfin analysis shows. At the same time, new-home sales increased 5.6%.

Steve Alloy, chief executive officer of Stanley Martin Homes, said the surge in demand took him by surprise. The Reston, Virginia-based builder was projecting a 10% annual increase in net sales in the first quarter. It turned out to be about 40%, he said.

That’s partly a factor of what buyers have had to choose from: Newly built homes now account for a third of available inventory, more than twice normal levels. The trouble with many pre-owned properties that are on the market is that they’ve lingered for some time and are simply unattractive to families looking to move in quickly.

In suburban Nashville, Tennessee, Bea and Deon Richardson grew tired of their 1,300-square-foot (120-square-meter) house, which barely had enough room for two people to fit in the kitchen. But the couple, a government healthcare billing employee and a warehouse manager, found only places that were similarly cramped — and expensive, especially given the cost of necessary repairs.

Their Redfin agent, Jennifer Bowers, suggested they explore new homes. They eventually found one for $314,000, at the upper end of their budget. After negotiating $15,000 in concessions from the local builder — including a rate buy-down to 5.5% — the new house turned out to be more affordable than the resale properties they had considered. The builder even threw in a fenced-in backyard.

The couple closed on the deal this week after selling their previous house and giving up their 2.9% mortgage rate. But they made a small profit on the sale and are much happier with the open floor plan across 1,600 square feet, said Bea Richardson.

“The existing houses are very small for the price you have to pay,” she said.

For the most part, builders can afford to discount since materials costs have eased and profit margins remain sizable. Builders dramatically increased prices during the pandemic boom, when anxious buyers went in search of pristine dwellings, with extra rooms for offices and backyards for lockdown pools and puppies.

Then mortgage rates started climbing from near record lows last year, making purchases less affordable and forcing builders to compete by slashing costs to lure buyers. It took some time but the strategy seems to be working.

Now, with demand humming, some builders are starting to be less generous with those perks. Alloy said Stanley Martin, for one, is scaling back on incentives while increasing construction starts.

“We’re back to a more normal market, neither weak nor crazy,” said Alloy, whose company builds throughout the Southeast.

For sellers, the flood of new construction can be a problem. Another client of Bowers is trying to sell a house that was purchased new a year ago in Clarksville, Tennessee, an area saturated with homebuilder subdivisions. It’s been on the market for about 45 days and the family needs to move because they’re relocating to Virginia for a job.

It’s a similar story in Las Vegas, where inventory is at less than half of normal levels but properties are still lingering, said Cindy Mae McNabb, an agent with Huntington & Ellis.

“Buyers are ready to shop but are not seeing what they like,” she said. “Fifty percent of what I sell is new construction. The incentives are so desirable, especially for first-time buyers.”

This article was written by Prashant Gopal from Bloomberg and was legally licensed through the Industry Dive Content Marketplace. Please direct all licensing questions to [email protected].