Why Home Builders May Need to Cut Prices to Sell Homes

In America’s red-hot housing market, where high prices and high interest rates have weighed on prospective buyers, home builders have had to get creative to sell their assets.

Home Buying Perks

Mortgage rates have been elevated in recent years in response to the Federal Reserve’s high-interest rate policy to fight inflation. The high costs have weighed on the housing market, pricing some buyers out, and making it harder for home builders to offload new properties despite the shortage of for-sale units in the U.S. Buyers have fewer options, so to seal the deal, they simply sweetened it. 

Builders relied on strategies like mortgage rate buydowns, a financing tool that enables homebuyers to take on a lower mortgage rate in exchange for an initial lump sum. Typically, this payment is covered by the borrower, but some home builders have instead spotted the cash, eating the extra cost to buoy sales volume, according to a report by the Wall Street Journal. In August, mortgage rate buydowns helped lead to a 10% year-over-year increase in new home sales, according to Census Bureau data. Existing homes didn’t see the same kind of bump.

But mortgage rates have come off their highs, the Federal Reserve has begun to cut interest rates, and more cuts are expected in the months ahead. This is making things tricky for builders.

Home Builder Viability

Here’s one thing that could happen if mortgage rates continue to fall: Homeowners who previously felt locked into their home and mortgage, may feel that selling their existing place to buy another one (perhaps they have outgrown their home, or children have left the nest) is a viable option again with lower mortgage rates. This could add more existing homes to the for-sale market, and divert attention from new builds.

For the builders of new homes, this could mean that the incentives that have worked so far to lock in a sale won’t be as successful anymore. The next step, then, may be straight up price cuts, which could be great news for buyers, and tricky news for builders.

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