Publicly listed US homebuilders are raising prices on new construction, taking advantage of an acute shortage of previously owned homes in the market as owners defer upgrading due to high mortgage rates.
Homebuilders are enjoying this turn of events after a gnarly second half last year when fears of rising interest rates slowing demand had forced them to cut prices and offer incentives to boost sales.
The shortages have powered homebuilders’ earnings, sending their stocks soaring, with the S&P Composite 1500 Homebuilding Sub Index up 41.90% so far this year.
The current average rate of above 7% on the popular 30-year fixed mortgage, according to the Federal Reserve Economic Data, compared to below 5% that 80% of homeowners have per a recent survey by Zillow, is making upgrading homes less attractive.
It is thereby squeezing the pool of existing homes, which are typically more affordable than new construction.
The number of newly listed homes, of which existing homes usually make up a majority, was down 24.8% in July from a year earlier, according to data from real estate broker Redfin.
Buyers “can’t find anything” on the resale market, said luxury homebuilder Toll Brothers in a post-earnings call on Wednesday, as it announced a 10% sequential rise in price in the quarter ended July.
Other homebuilders Lennar and PulteGroup have raised pricing by about 1% to 3% from the previous quarter.
Public homebuilders on average have raised prices in about two-thirds of their communities, said BTIG analyst Carl Reichardt.
This comes as the pricing gap between existing and new homes has narrowed, following a price appreciation in the resale market.
The median July sales price of new homes sold was $436,700 compared with the median existing home price of $406,700, according to data from the Census Bureau and the National Association of Realtors.
“Homebuilders are generally price-takers,” said Matthew Bouley, analyst at Barclays. “When the existing home market is seeing a price appreciation, it supports pricing power for new construction.”
Room for further price hikes and faster construction cycles will continue to lift the profit margins for homebuilders in the second half of the year, say analysts.
“We think there is an additional leg higher in margins ahead of us,” said Bouley.
However, as a consequence of the recovery in new construction prices since last year, “affordability is close to its worst levels in at least the last three decades,” said James Egan, Morgan Stanley housing strategist.
It declined 12% in June from a year earlier, but the pace of deterioration was the slowest since 2021, added Egan.
This will force homebuilders to remain sensitive to market traffic and sentiment among customers when it comes to the degree of price hikes implemented, said BTIG’s Reichardt.