Homebuilders are tapping the brakes on construction as higher mortgage rates turn buyers away.
Builders started construction of 14,871 new homes in the second quarter, down 7% from the first quarter’s record 16,012 starts, according to Dallas-based Residential Strategies Inc., a research and consulting firm that tracks new home activity.
“Progressively, as we’ve gone through the last three months and the traffic and sales have moderated, the builders are changing their approach to the market,” said Ted Wilson, principal with Residential Strategies.
Wilson expects construction starts to be slower in the third quarter, as builders have realized the faster pace in recent months is unsustainable. They are still dealing with labor and supply chain challenges that have dragged out the amount of time it takes to build a home.
For the past eight quarters, builders started construction on almost 22,000 more units than they have sold.
“While many D-FW builders had ambitious growth plans during the period of low mortgage rates and heightened demand, the fact of the matter is that limited construction capacity has restricted the builders’ ability to complete and close houses,” Residential Strategies’ Cassie Gibson said in a statement.
Buyer sales traffic dropped significantly over the course of the quarter, with June sales activity at 30% to 35% of April levels, the firm found through anecdotal field reports from builders.
The average rate for a 30-year fixed-rate mortgage rose from record lows of less than 3% in 2020 and 2021, and was at 5.3% as of July 7. That could add hundreds of dollars to buyers’ monthly payments. Home lending activity for new purchases in Dallas-Fort Worth fell about 20% year over year in the first quarter, according to Attom Data Solutions
While there are fewer prospective buyers in the market, there are still enough who are able to buy that builders have generally not had to cut prices.
“There’ll be a limited amount of [price reductions], but builders are still making pretty decent margins,” Wilson said.
Many builders are buying down or locking in mortgage rates to help potential buyers with financing. They may also cover closing costs.
“The era of ‘take it or leave it’ is kind of gone,” Wilson said. “The builders will work with you to make sure you find what you want.”
Over the past couple of years when interest rates were low, homebuilders were selling homes later in the construction process since everything they built was selling. Wilson said that now he expects builders to work through the backlog of homes they have already started and then begin building to suit.
