New home sales surge; margin pressure on homebuilders mounts

Belated new-home sales levels reached a more than three-year peak in September and October, but selling prices plummeted as homebuilders dialed in concessions to pull hesitant buyers from the sidelines.

Even as new-home sales show signs of solid demand, homebuilders face mounting pressure to bridge affordability challenges by leveraging incentives, costly mortgage buydowns, and lower prices. These tactics come at the expense of their operating margins, but are necessary to move abnormally elevated levels of started- and completed inventory.

Census data, delayed due to the Federal shutdown in September and October, reveal that the number of new homes sold stayed relatively flat between September and October. However, sales increased 18.7% year over year. Further, the September-October 2025 period is now the strongest two-month stretch for new-home sales since January and February 2022.

New single-family home sales in October 2025 were at a seasonally-adjusted rate of 737,000, down just 1,000 from September. Meanwhile, the median new-home sales price of $392,300 was down 3.3% sequentially and 8.0% year over year, as the new-home price premium — the gap between new- and existing-home prices — has reached a record low.

In a provided statement, First American Senior Economist Sam Williamson said that “easing mortgage rates—paired with builder incentives and price flexibility—continued to draw buyers back into the market.”

The South continued to dominate the housing market, with the region accounting for 513,000 new homes sold in October, nearly 70% of the national total. New home sales in the South also grew 42.1% year-over-year, despite challenging conditions in many markets in the region.

Homebuilders in the South, the fastest-growing region in the nation, are working through an oversupply of new homes. This is because they built too many speculative homes in the years following the COVID pandemic.

Builders have gotten increasingly aggressive in selling their existing speculative inventory, which tends to lose value the longer it remains on the market. To do that, high-volume builders need to draw from a full repertoire of incentives and price reductions to reel in buyers. This explains why the large metro areas that experienced the largest declines in home prices last year were all in the South, led by Austin, Tampa, Miami, Orlando, and Dallas.

Despite a two-month blip in new-home sales, builders have clearly pulled back on construction as they work to balance inventory with demand in certain markets. The Census estimates that the seasonally adjusted number of new houses for sale at the end of October was 488,000, unchanged from November and up only 1.7% year over year.

Housing starts also fell 7.8% year-over-year in October, and single-family permit authorizations were down 9.4% annually. NAHB Chief Economist Robert Dietz forecasted a very slight increase in both new residential construction and new home sales in 2026.

“We’re seeing some improvement [in new-home construction]. One of the big helping factors is the ongoing easing from the Federal Reserve. While the Fed doesn’t control mortgage interest rates, lowering the Fed funds rate does have a direct effect on the interest rates that builders pay on construction and development loans. That’s good news for the supply side, good news for inventory, and, therefore, good news for home buyers and renters. For 2026, we’re looking for about a 1% gain in single-family home building and about a 1% gain in new-home sales, “ he said in a statement.

Dietz also noted the geographic slowdown in construction in the Sun Belt, while pointing to Midwestern markets like Columbus, Indianapolis, and Kansas City as markets with outsized growth.

How homebuilders are navigating the current environment

The latest Census data release comes as no surprise among homebuilders. New home sales are up, but so are builder incentives and concessions, resulting in deeply compressed margins. As a result, builders are looking for ways to reduce spec home inventory.

Many builders are forced to choose between maintaining a high sales volume and accepting lower margins, or pulling back on construction and ceding market share in exchange for higher profitability.

Lennar and Smith Douglas Homes are examples of the former strategy, prioritizing a high-paced growth blueprint. However, even those builders are growing carefully.

Lennar, for example, is planning to deliver 85,000 homes in 2026, a 3% increase from 2025, same as the growth rate experienced last year. Lennar executives believe that modest growth could boost margins slightly. Despite a heightened incentive rate of about 14%, new orders increased 9% last year.

Tri Pointe Homes exemplifies the slower growth strategy, as the builder scaled back on new home starts in the second half of 2025. However, executives believe that the company’s move-up customers, with a strong average household income of $220,000, are positioned to re-engage with the housing market when conditions improve.

“In the short-term, we are prioritizing inventory management, disciplined cost control, and the sale of move-in-ready homes while steadily increasing the mix of to-be-built homes over time,” Bauer said in an October earnings call.

Many builders cite weak consumer confidence as a main factor to look out for in 2026. A jobs report released on Friday could heighten that concern, as the U.S. economy added only 584,000 jobs in 2025, the slowest year for hiring since 2020.