Within the most recent years, New Construction Home has become quite a popular option among Homebuyers, especially younger buyers, due to many positive and convenient aspects with very little drawbacks.
If you are not familiar with New Construction Homes, they are typically in contract before construction process is even close to being done for most cases. Because they are delivered to buyers brand-new with many possible modifications, they are often very in high demand. As the matter of fact, during the Covid Era, most builders charge above market price for these units and buyers would line up out of the door to just get on the waitlist (this is just a figure of speech but the waitlist thing was real).
However, with a drastic increase in interest rate, we went from a drought to having an abundant amount of new home inventory.
So What is actually happening with the new home market?
Builders
According to John Burns Real Estate survey of 104 builders across the United States, from having to do zero marketing and still selling out their inventory, builders have to offer much higher incentives and even a major price reduction in attempt to meet their targeted sales goal. Since buyers want Quick-Move-In homes, builders with the completed or almost completed built-out inventory will win.
However, with the new interest rate surpassing 7% at the publish of this article, most builders still experience significant slow-down in traffic and increase in cancellation rate because either the majority of their applicants are getting cold feet or they cannot get qualified for a mortgage with the new rate.
In terms of profitability, once again, with an average rate of 2-6% incentives along with price-cut across all markets, builders’ net-profits continue to shrink over time and we didn’t even mention the rise of labor cost and building materials as well.
Buyers
Besides the obvious fact that buyers are having a hard time getting approved for a mortgage, the uncertainty in the current economy is making everyone slow to act due to the gap of expectations between builders/sellers and buyers. Even with huge incentives to assist with closing cost and purchase price, buyers still believe now is not a great time to buy and they want to wait out until there’s more clarity in our economic outlook. Some want to wait for a bigger price drop and some just believe owning a home is now out of their reach in certain market. Make sure you read more about the Price to Earning Ratio concept I wrote about a while back to fully understand the full picture.
To the extreme here, even some buyers who are already in contract would be willing to lose their deposit to avoid going through with the purchase!
How about Southern California Market
In Orange County & San Diego County, luckily for builders, the market still remains somewhat steady for new construction. Of course, we cannot compare their current pace to last year simply because of the major changes happening.
Meanwhile, Inland Empire and Los Angeles County, in my own surprise, are experiencing major slow down according to the survey. Perhaps, builders must make quick adjustments in their disposition strategies in order to meet the lower demand of buyers and it can either be an appropriate price cut or decent incentives.
To learn more about the prediction on future of home prices, you can read more here.
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