High mortgage rates, anemic housing supply in some regions and record prices have forced many Americans to sit tight on buying a new home or selling their existing one.
For builders of new homes, that has meant offering more incentives, like cutting interest rates on a mortgage for the first few years, giving buyers more money toward closing costs or reducing the list price of a home.
Sales for new single-family homes in July were down 0.6 percent from June and 8.2 percent from the year before, according to data released on Monday from the U.S. Census Bureau. Roughly two-thirds of builders said they had used incentives in August to draw people into homes, according to a survey by the National Association of Home Builders and Wells Fargo Housing Market Index. Nearly 40 percent of the builders surveyed reported cutting prices, with average reductions of 5 percent, compared with 29 percent of builders who said they cut prices in April.
Stuart A. Miller, a chief executive of Lennar, one of the nation’s largest residential builders, said on a June call with analysts that the company had offered incentives of more than 13 percent of a home’s cost in the second quarter and that it would continue focusing on “lower cost structures.” That’s more than double the normal incentive rate, which Mr. Miller said on a March call should be around 5 or 6 percent.
These efforts have been buying builders time, but incentives and price cuts can go only so far to bring down costs if mortgage rates remain high and affordability continues to be out of reach for buyers.
While companies remain profitable now, the amount they’re pulling in has slowed, recent earnings reports show. D.R. Horton, which has also increased incentives, reported home sale revenues of $8.6 billion in the quarter that ended June 30, down from $9.2 billion a year earlier, with roughly 1,000 fewer home sales closed. KB Home reported in June that home building revenues were $1.52 billion, down 10 percent from 2024.
Investors are rallying behind the industry for now because many see the cooling as a natural cycle that will change as interest rates come down, said Sam Reid, a home builders and building products analyst at Wells Fargo. Share prices for some of the biggest publicly traded builders are up. But if better rates do not materialize, and if incentives continue to increase as inventories grow, he added, “then, realistically, the sector is likely to unwind.”
The biggest builders, which commonly have in-house mortgage lenders, have also managed to ease investors’ concerns about their ability to weather the market, Mr. Reid said. One example is that they have been able to temporarily keep expenses down by negotiating with their suppliers, even as building material costs rose about 35 percent from 2020 to 2024. Companies like Lennar have focused on buying materials in volume and building only as much as they’re selling.
“Our construction costs have actually decreased over the past two and a half years,” Mr. Miller said on Lennar’s earnings call in June. “As the market has gotten even more difficult, and given the continued deterioration in market condition, we are putting increasing pressure on our trade partners to force cost down further.”
Sheryl Palmer, the chief executive of Taylor Morrison, another national builder, said the company had renegotiated every recent contract it had entered with suppliers. “If we couldn’t renegotiate, we walked from a few,” she said.
Aside from incentives, builders are constructing more smaller homes on smaller lots, making the math work for potential buyers. The average lot size for new builds was 460 square feet smaller in 2024 than in 2018, according to Zillow, the country’s largest site for real estate listings.
Ted Leighty, chief executive of the Home Builders Association of the Denver metro area, said more town homes were being built. “It really comes down to the ability to pay,” he said, adding that he believed the trend was likely to continue, though a majority of new homes in the area are still single-family units.
Slower demand from buyers due to high interest rates and affordability issues has contributed to the home inventory’s being the highest it has been since 2019, according to Zillow. In June, the number of homes on the market was up 17 percent from the year before, according to the National Association of Realtors, a signal that people who may be interested in buying a home are still wary about doing so.
There are other concerning signs for the industry. Home sales nationally are still lagging. And even though the number of homes on the market is creeping up, construction of single-family homes is down in areas where high mortgage rates and low buying have had the most impact. Robert Dietz, the chief economist at the National Association of Home Builders, said he estimated new single-family home construction would be “down at least 10 percent this year.”
All of this, though, has evened out the playing field for potential homeowners in some parts of the country.
“The bargaining power, the balance of power, has shifted from sellers to buyers,” Orphe Divounguy, an economist at Zillow, said.
“You have a ton of pent-up demand, but because of affordability challenges, because of the fact that the labor market is cooling right now, because of all the uncertainty around the economy, people are delaying their moves,” he added.
Robert McGibney, the president of KB Home, said on a June earnings call that rising political tensions were “driving consumer confidence to a 13-year low.”
At the same time, some cities have been moving to relax regulations that have been major hurdles for builders, including minimum parking and lot size requirements. If those are adjusted, and if buyer demand goes up, the market could correct itself.
Mr. Divounguy said that if requirements could be pulled back, “we’re going to see more of what we saw in 2024, which is builders will come back.”