New Home Builders Facing an Old Competitor Again

Yesterday there was a shortage of homes for sales and the Law of Supply and Demand was firmly in place. Today, rising interest rates and inflation rule the roost which means home sales are beginning to flatten and even decline in many parts of the country.

Current home sellers, the builder’s competitors, clearly see the market softening. Pending home sales, a measure of signed contracts on existing homes, dropped nearly 4% in April from March. They were down just over 9% from April 2021.

While home prices rose steadily during the first two years of the Covid pandemic, falling mortgage rates largely offset those increases.

For example: In May 2019, a buyer purchasing a $300,000 home with a 20% down payment and a 30-year fixed mortgage would get an average interest rate of around 4.33%. The monthly payment of principal and interest would be $1,192. In 2020, that same house was 5% more expensive, but mortgage rates fell to 3.41%, so the monthly payment actually dropped to $1,119.

By 2021, the monthly payment was only up about $100. This month, with prices rising another 21%, and mortgage rates surging to around 5.5%, the monthly payment hit $1,991 – almost $800 a month more than it was in 2019.

While home sellers were in the driver’s seat barely six months ago, they are now seeing far less competition from buyers.

New home builders are being hit with paying more for their spec homes and must maintain a higher asking price just to make a profit while their new competitor, the person selling their home, is super motivated to sell now rather see their home value drop further. Many have a lot of equity in their homes and can afford to drop the asking price and even accept a lower offer.

While the new home is stuck at the higher price, the used home is dropping making it the better buy. 

Nearly one in five home sellers dropped their price during the four-week period ending May 22 which also saw 13% fewer “homes for sale” browser searches on Google, and a 12% year-over-year drop in home tours and other related services from Redfin agents — the largest such decline since April 2020.

Sellers are still asking for a lot of money: The median asking price for a home climbed to a record-setting $418,000, up 17.8% year over year but the rate of price growth has been relatively low over the past four weeks, suggesting a possible plateau.

The bottom line today is sellers may soon decide to either start lowering the asking price of their homes or take it off the market and stay put for a while.

Unfortunately, all those new home buyers that have already built spec homes in expensive neighborhoods with materials purchased at outrageous prices may be stuck holding onto them for longer than they hoped.

One of the things we always seem to forget is that the housing market is always cyclical, meaning prices can’t go up forever and the higher they get, it seems the faster those prices drop. 

Are we seeing the first signs of a housing correction or a mini housing recession?