Homebuilders boost incentives because they suddenly struggle to sell their homes

Contractors work on the roof of a home under construction at the Steelpoint subdivision in Sumter, South Carolina, on Tuesday, July 6, 2021.

Mika Green | Bloomberg | Getty Images

After two years of not being able to build homes fast enough to keep up with demand, home builders in the country are now suffering from a slowdown in sales and an oversupply.

Newly built home sales fell more than 8% in June from the previous month and were 17% lower than in June of 2021, according to a report released Tuesday by the US Census. Inventory also rose to 9.3 months of supply, up from 5.6 months at the end of last year.

CEOs of major builders say they must respond more quickly to the sudden shift in the market, in part by boosting incentives.

The Pulte Group, one of the nation’s largest homebuilders, reported Tuesday that net new orders for its homes in the second quarter were down 23% from a year ago. The company’s cancellation rate was 15%, compared to 7% in the same period last year.

“We have to work harder to sell homes. We have to be smarter,” Bolt CEO Ryan Marshall said on a conference call with investors. “House price increases have slowed, or stopped, or, through the use of incentives, taken a few steps back. For most of the second quarter, incentives were mostly mortgage related, but this is now expanding to include discounts on options and a lot of instalments.”

The median price for a newly built home that sold in June was $402,400, still 7.4% higher than a year ago. But the market was seeing double-digit price increases. Builders are getting help from now lower prices for goods, especially lumber, and land prices are starting to adjust to the drop as well.

However, buyers are still being shocked by the sharp rise in mortgage rates and macroeconomic inflation. The average 30-year fixed-rate mortgage started this year around 3% and then started rising steadily. It jumped more than 6% briefly in June, before settling back into the high 5% range.

“Consumer, really, in the middle of June we saw this kind of pullback, this pause. I manipulated our sales people the other week that they switched from order taker to financial processor,” said Doug Bauer, CEO of Tripointe. Homes on CNBC’s “Squawk on the Street”.

The creator also increases the incentives for the buyer.

“I think over the next quarter or two there will be some price discovery as we match mortgage payments with prices,” Bauer added.

Existing home prices are starting to come back down to earth. While still in the double digits, price gains in May slowed for the second month in a row, according to the S&P Case-Shiller National Home Price Index. Prices are stubbornly high in the current domestic market because supply is still very low. The builders were helping, speeding up the construction, but that suddenly changed.

“This may just be the beginning of a difficult stretch for the homebuilding industry,” said Nicole Baswood, Zillow’s economist. “The slowdown in housing permits and start-up activity will cap sales in the near term and suggest that builders are preparing for a more bumpy road, even as the housing market remains hungry for more inventory as long-term demand continues.”

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