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What Low Builder Confidence Means For Buyers

August 15, 2022
Posted in Programs
August 15, 2022 derekevansteam

In a recent press release, the National Association of Homebuilders (NAHB) noted 69% of builders reported higher interest rates as the reason behind falling housing demand and that nearly 20% home builders reported reducing prices last month (the median price reduction was 5%) in response to a slowing sales and increasing cancellations.

Why are buyers cancelling? Consider a buyer looking to purchase a $600,000 newly built home. Let’s say they contacted their lender, or the builder’s lender, in March of this year, and were pre approved using the prevailing 30-year fixed interest rate of 4%. They present the builder with their pre approval letter and pay the earnest money deposit to secure a contract on a particular unit that has a completion date of August 2022. In that time, March through August, rates rise about 1.5 percentage points from their initial pre approval in March. For this example, let’s say that the buyer is no longer qualified for the amount originally pre approved at, and can no longer close on the loan.

In response to this common scenario, builder confidence fell for the eighth straight month as, in addition to elevated interest rates, ongoing supply chain problems continue to exacerbate housing affordability challenges. In fact, builder confidence fell to 49, marking the first time since May 2020 that the index fell below the key break-even measure of 50 on the Wells Fargo Housing Market Index (HMI).

NAHB Chief Economist Robert Dietz says “tighter monetary policy from the Federal Reserve and persistently elevated construction costs have brought on a housing recession.” He also noted that “the total volume of single-family starts will post a decline in 2022, the first such decrease since 2011. However, as signs grow that the rate of inflation is near peaking, long-term interest rates have stabilized, which will provide some stability for the demand-side of the market in the coming months.”

Reduced home prices combined with rate stability are making for a good time to get into the market. Buyers who took a break from their home search are now finding that there is more inventory to choose from and are even seeing seller concessions and price reductions, not only on new builds, but existing home sales. If you’re looking to jump back in, get pre approved today!