Builders nationally remain uneasy about new home sales, reporting the highest share of discounts this month since before the pandemic. At the same time, positivity could be on the horizon as homebuilders await the Federal Reserve’s decision on borrowing rates expected Wednesday.
Homebuilder sentiment about current and future home sales was negative for the 17th consecutive month in September, according to the National Association of Home Builders/Wells Fargo Housing Market Index. Survey results posted a reading of 32, the same confidence level as August’s index. Any reading below 50 is considered negative.
The continued low confidence in sales has pushed builders to offer more sales incentives, such as closing cost assistance, mortgage buydowns and free upgrades, and to cut home prices, giving buyers a deal as affordability remains a concern.
The share of builders offering incentives in September was 65%, down 1% from August, and 39% of builders discounted their homes, up from 37% in August.
The average price discount was 5%. That means on a new home listed at the median price of $403,800, a buyer could save $20,190. Those savings depend on the builder, with some major national homebuilders posting even higher savings, while some smaller builders offer little to no price cuts.
That could change as the Fed is set to meet on Wednesday, where experts predict a cut to rates.
“NAHB expects the Fed to cut the federal funds rate at their meeting this week, which will help lower interest rates for builder and developer loans,” said NAHB Chief Economist Robert Dietz in a statement. “Moreover, the 30-year fixed rate mortgage average is down 23 basis points over the past four weeks to 6.35%, per Freddie Mac. This is the lowest level since mid-October last year and a positive sign for future housing demand.”
Top builders see lower sales prices
Incentives and price cuts have been commonplace for many homebuilders throughout the year as they face slowed sales from near 7% mortgage rates, higher home prices, and rising construction costs.
In their recent earnings calls, major homebuilders reported increasing incentives and decreasing home sale prices. K. Hovnanian Homes posted a 4.3% price decline for the quarter ending July 31 for an average sales price of $534,497. The firm completed over 6,000 homes last year in more than 192 neighborhoods.
Meanwhile, builder Toll Brothers reported offering incentives that averaged about 8% of their sales price. Penciled out, the homebuilder delivered savings of about $76,000 on its average home sale price.
Looking ahead
While the Fed’s decision does not alone determine mortgage rates, it has a significant influence. Mortgage rates are set by multiple factors, such as the bonds market, and all of which are affected by the Fed’s moves.
Homebuilders are hopeful that mortgage rates will decline. The survey found builders were more confident about future home sales, posting a sentiment of 45, up 2 basis points from August and the highest share since March.
“While builders continue to contend with rising construction costs, a recent drop in mortgage interest rates over the past month should help spur housing demand,” said NAHB Chairman Buddy Hughes, a homebuilder and developer from Lexington, North Carolina, in a statement.