Builders Are Lowering Prices: Will It Be Enough?

August 16, 2019

Home builders are starting to lower their prices to better reach out to the growing demand for smaller, more affordable homes. Sales prices of new homes dropped 0.5% in the second quarter of this year from 2018 levels.

Prices for new homes reached a median of $372,900 in the second quarter, while the median sales price of existing homes was $309,700.

New home price chart. Visit source link at the end of this article for more information.

© Redfin

Builders appear to be shifting their focus to less expensive homes. “While this change was a clear and long-needed response to homebuyer demand and tastes amid an affordability crisis and a softening market, it also means that builders are now focused on homes that are less profitable for them,” says Daryl Fairweather, Redfin’s chief economist. “As builders continue to adjust to a less favorable market, along with rising tariffs for building materials and a labor shortage, I expect to see new-home inventory stay low overall. But low mortgage rates and more affordable new homes mean sales could strengthen a bit in the coming months.”

Sales of new homes so far this year have only inched up 0.8% in the second quarter year over year. Meanwhile, new-home supply has decreased by 1%, which is one of the largest annual declines since the first quarter of 2013, according to data from Redfin.

The small price decline in the new-home market, along with a 0.7% annual decrease in new listings and a 3.4% drop in building permits, has made the new-home market softer in the second quarter, according to Redfin researchers.

Still, builders are hopeful. Builder confidence within the single-family new-home market rose slightly in August, according to the National Association of Home Builders/Wells Fargo Housing Market Index, released Thursday. Lower mortgage rates may help lure more buyers, but economic uncertainty may also limit growth too, says Robert Dietz, the NAHB’s chief economist. Still, “demand is good and growing at lower price points and for smaller homes,” he notes.

While demand is increasing for single-family homes, builders continue to struggle with rising construction costs from “excessive regulations, a chronic shortage of workers, and a lack of buildable lots,” says Greg Ugalde, the NAHB’s chairman.