Builders Cut Prices. Home Sales Jump 18%.

Builders Cut Prices. Home Sales Jump 18%.

Home Builders are cutting prices. And the price reductions are working to attract buyers back into the market. With builders reporting an 18% jump in sales in the most recent US Census Bureau report.

This report is adding to the bullish sentiment that has developed in the Housing Market over the last two months. In particular, some Home Builder CEOs are claiming that the Housing Crash is Over.

Some are even saying that it will be a "solid" year for the Housing Market in 2023.

As a result, homebuyers are concerned. Has the bottom passed? How much more, if at all, will prices decline?

Let's take a look at the data to find out.

1) Builder Home Sales UP in recent months. But DOWN significantly YoY.  

The builders reported 55,833 seasonally-adjusted monthly sales in January 2023. That was up 18% from the lows experienced last summer. This increase is stoking optimistic sentiment among Builder CEOs, realtors, and investors.

New Home Sales have increased in recent months. But are still well below 2022 levels.
Builder home sales are up 18% from their lows in Summer 2022 (Source: US Census Bureau)

But hold on a second. New Home Sales in January 2023 were still down 24% from their levels one year ago. And down 35% from the pandemic peak experienced in late 2020. And still below the long-term, six-year average (yellow line).

So we have an improvement in new home sales, but the figures are not good.

There's also a good chance the the recent uptick in sales is an unsustainable blip. That's because builders are still reporting depressingly low level of buyer traffic.

2) Buyer Traffic still near lowest levels since 2008 Crash.

The National Association of Home Builders (NAHB) reported that Buyer Traffic at home building sites measured an index level of 29 in February 2023. That level crashed an astonishing 56% YoY, and 40% from pre-pandemic levels.

Builder buyer traffic has collapsed over the last month.
Home builder buyer traffic is still near the lowest level in history (Source: NAHB)

Those declines in buyer traffic are much worse than the declines in sales, which were down 24% YoY and roughly match pre-pandemic levels. Suggesting that something "funny" is going on with the rebound in sales.

Perhaps it's not new buyers stepping into the market to buy homes, but those who toured building sites in 2022 and were sitting on the sidelines.

3) Builders are cutting the price. Which is attracting some buyers off the sidelines.

Last month the CEO of Meritage Homes, a large builder, reported that their average selling price was down 20% from peak. Here's the direct quote:

So, kind of looking at where we are, we're comfortable at our current pricing structure. We're down almost 20% from the peak, and we're able to sell at an acceptable pace.

These big reductions in selling price were enough to get Meritage back to a sales pace that they like. Supporting the notion that homebuyers in today's market are more price-sensitive than they are interest rate sensitive.

These builder price cuts are also showing up in the broader data reported by the US Census Bureau. The Median Sale Price for new homes fell to $428,000 in January 2023, falling 14% from its October peak.

Home Builders are cutting the prices on new homes to boost sales.
New Home Prices are down 14% from peak and also down YoY (Source: US Census Bureau)

While there are some seasonal variations in these builder sale prices, the stark decline since October is likely more than just seasonality. Indicating that builders are making a genuine effort in many markets to cut prices and move their inventory.

4) Builders are also doing sketchy Mortgage Rate buydowns. Which could be tricking some people into buying.

Last week I walked through a homebuilding site in Tennessee. And saw the below advertisement. The builder said they could do a 3.99% Mortgage Rate.

It was on a big sign in front of the house that was for sale. And it certainly caught my attention.

Then I dug into the fine print. Which you can see in the yellow highlighted area above. The fine print says, "Rate is 3.99% in year 1, 4.99% in year 2 and 5.99% years 3-30".

Ah. There's the catch. The builder will buy down your rate for the first two years to give the appearance of a cheaper monthly payment. But by year three the owner will get smacked with a big increase. In what is essentially a defacto adjustable-rate mortgage. Remember those from the mid-2000s downturn?

I suspect some people might be getting hoodwinked by these mortgage rate buydowns and buying a house they cannot really afford. Which could be increasing sales in the short-term.

5) Overall Buyer Demand is still pitifully low.

Early this week the NAR announced that Existing Home Sales for January were down 37% YoY, at the rock bottom levels experienced during the 2008 Housing Crash.

Then on Wednesday the Mortgage Bankers Association announced that mortgage applications to buy a house in mid-February fell to the lowest levels in 28 years.

Meanwhile - Mortgage Rates just shot up to around 6.8%. Which could depress buyer demand even more in future weeks/months.

Zooming out: the data on homebuyer demand in America looks very bad in early 2023.

Indicating that...

6) This Home Builder "Recovery" is not sustainable.

Home builders have managed to moderately boost sales in recent months by cutting prices and offering mortgage rate buydowns. Many in the industry are calling this increase in sales a "recovery" and are declaring that we've reached a "bottom" in the Housing Market in early 2023.  

However, to call this a sustainable recovery we would expect to see the following data points support the increase in sales:

  • Significantly higher buyer traffic
  • Increased mortgage application volume
  • Declining mortgage rates

None of which are happening. In fact, the data on all three directly contradicts the notion that a sustainable recovery is taking place.

Now - an interesting question to ask is: "Should I buy a new home"?

After all - if builders are willing to cut the price by 15%, and to give me a discount on mortgage rates for the first couple years, maybe that's a better alternative than buying an existing home?

For a homebuyer who is desperate to buy today and can't wait any longer, builders are certainly offering more flexibility than the stubborn sellers of existing homes.

But it's important to be careful buying new homes. Especially related to issues in quality of construction. There have been non-stop stories over the last 2 years about shoddy construction work on new builds. And builders being slow or outright refusing to make repairs after the owners move in.

Moreover, if you buy in a home-building site, be prepared to see the value of your house decline as these builders don't care much about cutting the price of their new inventory after you buy.

Would you consider buying a newly built home at today's prices? Are you seeing the builder discounts in your area? Let me know in the comments below.