The share of new homes on the market surged to record levels last quarter as mortgage rates jumped to a 22-year high, according to real estate brokerage Redfin, forcing builders to offload homes with steep incentives and at lower prices in a bid to attract prospective buyers.
A record 29% of single-family homes for sale in the third quarter were newly constructed, climbing from 25% in the same period last year and 18% in 2020 thanks in part to the highest number of new homes finishing construction and entering the market since 2007, Redfin reported Tuesday.
Newly built homes have been making up a growing portion of the overall housing supply since 2011, when building started to rebound after the financial crisis, but Redfin notes the trend is now “intensifying” due to a surge in construction during the pandemic and a recent slowdown in existing homeowners putting their homes for sale.
In a statement, Redfin agent Faith Floyd said homebuilders who started “scores of projects” during the pandemic-era home-buying frenzy are now “stuck with a bunch of new houses that are hard to sell” because mortgage rates have risen to 7%, driving up the cost of new mortgages by an average $800 per month, according to Zillow.
As demand craters, the impact has been harshest on pandemic “boomtowns,” or areas that saw home-buying demand surge during the pandemic but now have been hit hardest by the dearth in prospective buyers, according to Redfin, which notes the highest percentages of new homes for sale are in markets like El Paso, Texas; Oklahoma City; Omaha, Nebraska; Raleigh, North Carolina; and Houston.
For buyers, that has meant offering a slew of incentives to attract bidders, with many builders buying down a buyer’s mortgage rate by 1.5 percentage points in addition to paying down closing costs and offering free appliances, says Floyd.
Meanwhile, builders are likely to construct fewer homes next year as they’re forced to lower prices to help bolster demand, with some experts predicting new home prices in former pandemic hotspots could tumble as much as 20% by early next year.
“Builders are giving away everything but the kitchen sink to attract bidders… I’ve seen at least one offer a $10,000 check for closing costs, a $3,000 gift card and a free fridge,” says Floyd. “This is one way builders will dig themselves out of the hole they’re in.”
Despite the rash of incentives homebuilders are starting to throw at buyers, many experts say it may not be smart to buy a home until rates come down. “It’s the worst time to buy a home in a very long time,” Columbia real estate professor Christopher Mayer recently told Marketplace. The Mortgage Bankers Association projects rates will fall to about 5.5% by the end of this year.
Skyrocketing inflation has forced central banks around the world to reverse pandemic-era policy measures meant to bolster markets—and the Federal Reserve’s rate hikes this year have hit the formerly booming housing market particularly hard. New-home sales plunged to a six-year low this summer as mortgage rates jumped to a 22-year high, and plunging mortgage applications suggest the collapse will only get worse. Research firm Pantheon Macroeconomists projects monthly new home sales could fall to a 10-year low of 350,000 as soon as this month.