Each month, NewHomeSource parent company Zonda surveys homebuilders to gauge current trends and market sentiment. These builder-focused insights can also offer clues for homebuyers about what is happening – and what could be coming – in the housing market.
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The prevailing story of the housing market is no secret to those tracking the space: economic uncertainty is weighing down consumer confidence and homebuilders are responding with sales incentives to attract hesitant buyers from the sidelines. The Zonda report takes a deeper look at current trends. The insights provided can inform buyers about potential shifts in the market moving forward.
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Below are three takeaways from the October report homebuyers should know:
1. Slower demand is shifting builder expectations. Declines in mortgage rates have not coincided with the expected increase in demand. Other economic concerns, related to the labor market, inflation, and affordability, are bigger factors for buyers than a decline in rates.
Additionally, the prevalence of sales incentives means that the value of purchasing an incentivized home is greater for a buyer than the potential savings when purchasing with an interest rate slightly lower than earlier in the year. The share of builders reporting demand is “slower than expected” is declining, but in many cases, this is because builders are adjusting their expectations instead of seeing increased buyer activity.
2. Market conditions are impacting land strategy. While it is not typically an area homebuyers focus attention on, the land pipeline for builders is a very important piece of the housing market puzzle. If there is less land in the pipeline, fewer homes will be built. If it takes longer to develop land, it will delay when homes are delivered.
For builders, the land market remains tricky given land price and deal term challenges. In October, builders were split nearly 50-50 when asked if they walked away from land due to changing market conditions. In some cases, the deals aren’t penciling for builders because of today’s level of necessary incentives. This trend may not impact the market today, but it is something buyers should be tracking.
3. Incentives are the top worry for builder margins. Incentives impact nearly all aspects of a builder’s operation. As the previous takeaway highlighted, it is impacting how some builders approach the land market. Another area it is impacting builders is their margins. The more builders must allocate toward incentives and price concessions, the more their margins are compressed.
As the first takeaway indicates, lower interest rates alone are not bringing hesitant buyers off the sidelines. Many buyers expect incentives from builders and are more selective about the homes they do purchase because of the incentives offered. As such, even though builders are concerned about the impact of incentives on margins, the sales tool is likely here to stay.
