A growing inventory of existing homes is holding back homebuilders, who are now delaying permits and starts and seeing high incentives rolled back.
According to the National Association of Home Builders (NAHB), home buyers in the existing home market may have a slight advantage over buyers looking for new homes.
The association released its latest NAHB/Wells Fargo Housing Market Index (HMI) on Tuesday, revealing that home builders are backing away from price cuts and other sales incentives that drove up the affordability of new homes last year. The percentage of builders who took advantage of incentives in the past month remained flat at 65%. Just 36 percent of those who took advantage of incentives said they included a price reduction, down from 40 percent in the previous three months.
The index is based on a survey of home builders and is intended to “track trends in the single-family housing market,” according to NAHB.
House builders were quite pessimistic about the immediate future, with the six-month sales index dropping from 50 points to 46 points. The inflow index for new home buyers also declined, dropping from 24 points to 22 points. Who is the culprit? Prolonged economic uncertainty, negative media coverage, and buyer expectations that prices and interest rates will trend downward.
The industry’s growing nervousness was reflected in the U.S. Census Bureau’s monthly new home construction report released Wednesday, covering trends in November and December.
In November, there were some expectations as the number of new housing starts increased by 2.1% compared to the same month last year. However, the following month saw a significant decline in new housing starts, down 7.3% from the previous year. The number of permits did not improve much, with an 8.0% decrease in November compared to the same month last year, and a 2.2% decrease in December.
Lisa Sturtevant, chief economist at Bright MLS, said increased existing inventory is feeding into the new construction market, making it easier for homebuyers to find what they want in the resale market. As a result, builders will be more “cautious” in the first quarter and wait for prices to pick up in the spring, he said.
“Despite the decrease in mortgages, [rates]”Homebuyers refrained from making purchases during the fourth quarter. Affordability and economic uncertainty continue to constrain homebuyers’ willingness to enter the market,” he said in a statement. Additionally, increased existing inventory is making new construction less attractive in some markets. ”
“New construction is likely to increase this spring as buyers show signs of returning to the market,” he added. “Even as demand improves, builders face supply-side challenges. Construction labor shortages, rising land costs, and often extensive zoning regulations will continue to make it difficult to build new homes, especially in the affordable range.”
NAHB Chief Economist Robert Dietz gave an overview of the new home market at the International Builders Show, saying homebuyers are likely to experience more affordability in the existing home market this year.
“We expect resale prices to fall in most markets this year to improve affordability conditions, because existing homeowners are still required to do the price studies that builders have been doing since 2022,” Dietz said in a statement Wednesday. “So we think that will happen in 2026, and of course it is necessary, because if you look at the ratio of house prices to income.”
Dietz said the typical home price is 4.9 times the typical income, reflecting the continuing challenge of closing the gap between wage and home price growth.
NAHB’s chief economist said that despite facing headwinds in the coming months, home builders are resilient and are offering smaller floor plans at more affordable price points. Typical floor plans are 5% smaller than they were in 2022, he said, contributing to a 15% decline in median new home prices over the same period.
But he said there was still much work to be done to help young homebuyers enter the market.
“Historically, the ratio of home prices to income has been 3 to 1, and this has been a well-understood rule of thumb that has been around for some time,” Dietz added. “A 5:1 price-to-income ratio makes it difficult for young households to save, even at 3.5 percent per household. [Federal Housing Administration] A 10% down payment on a home loan or conventional mortgage. ”
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