Publicly listed US homebuilders are taking advantage of the current shortage of previously owned homes in the market by raising prices on new construction. This comes after a challenging second half last year, where fears of rising interest rates affecting demand forced them to lower prices and offer incentives to boost sales. However, the shortage of existing homes due to high mortgage rates is benefiting homebuilders, leading to increased earnings and a significant rise in their stocks.
The current average rate of above 7% on the popular 30-year fixed mortgage, compared to the below 5% reported by 80% of homeowners, is making upgrading homes less appealing. This is causing a squeeze in the pool of existing homes, which are typically more affordable than new construction. Data from real estate broker Redfin shows that the number of newly listed homes, mostly consisting of existing homes, has decreased by 24.8% in July compared to the previous year.
Luxury homebuilder Toll Brothers reported a 10% sequential rise in price for the quarter ending in July. Other major homebuilders, such as Lennar and PulteGroup, have also increased their pricing by around 1% to 3% from the previous quarter. According to BTIG analyst Carl Reichardt, public homebuilders have raised prices in roughly two-thirds of their communities. The pricing gap between existing and new homes has narrowed, with the median sales price of new homes sold in July at $436,700 compared to the median existing home price of $406,700.
Barclays analyst Matthew Bouley explains that when the existing home market experiences price appreciation, it gives homebuilders the ability to set higher prices for new construction. Analysts predict that there is still room for further price increases and faster construction cycles, which will boost profit margins for homebuilders in the second half of the year.
However, the recovery in new construction prices has led to a decline in affordability, reaching its lowest levels in at least the last three decades, according to Morgan Stanley housing strategist James Egan. While the pace of deterioration slowed in June compared to previous years, Egan suggests that homebuilders will need to remain sensitive to market traffic and customer sentiment when implementing price hikes.
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