As was reported last week, new home sales in April
were much, much better than expected. There may or may not be a cause and
effect going on here, but two recent posts in the National Association of Home
Builders’ (NAHB’s) Eye on Housing blog indicate that builders are at
least trying to preserve some market momentum.
While builder confidence cratered in April and housing
starts declined, Rose Quint reports that there is anecdotal evidence that
builders were lowering the prices of newly constructed homes in April and that more
than half report making sales accommodations in May.
The latest NAHB/Wells Fargo Housing
Market Index (HMI) survey shows that about 22 percent of builders cut home
prices in April 2020 in order to bolster sales and/or limit cancellations.
Regionally, builders in the South (26 percent) and Midwest (23 percent) were
the most likely to have reduced prices, compared with much smaller shares in
the West (13 percent) and Northeast (12 percent). Again, there may be no
relationship, but the Census Bureau reported that new home sales were up 2.4
percent in both the South and Midwest and down 6.3 percent in the West compared
to March. However, sales were also up 8.7 percent in the Northeast, the region
with the lowest reported incidence of price cuts.
Builders were much more likely to
cut prices during earlier economic downturns. Fifty-two percent reported they
had done so in May 2007 and 49 percent in March 2008. The reduction reported thus
far during the pandemic averages 5 percent, again much smaller than cuts in
both May 2007 (7 percent) and March 2008 (8 percent)
Quint says only 12 percent of
builders think price discounts are ‘very effective’ in bolstering
sales/limiting cancellations. Fifty-eight percent say they are only ‘somewhat
effective,’ and 17 percent say they are ‘not at all effective.’ The remaining
13 percent are unsure.
In May, the HMI survey found 52 percent of respondents
were using concessions or incentives to either bolster single-family home sales and/or limit cancellations.
The chart below shows the complete list of specific incentives being used,
however Quint says those must frequently employed are options or upgrades at no
or reduced cost and payment of closing costs or fees, each reported by 19
percent of builders, and price discounts or margin reductions (18 percent.) of
those using incentives, most report paying for closing costs/fees is the most
effective strategy. Twenty-seven percent rated it ‘very effective’ and 56
percent ‘somewhat effective.’
were much more widely employed during the
last housing recession, with 73 percent and 71 of builders, respectively,
reporting their use in May 2007 and March 2008. By April of 2019, (we assume
this period relates to the build-up of new home inventories as interest rates
moved higher) the share had fallen to 64 percent . The current 52 percent providing
incentives in the midst of the COVID-19 crisis, is essentially the same share as
back in April of 2003. What Quint does not say is that it was only in mid-March
that the COVID crisis begin to impact the economy and builders have not had a
lot of time to assess the damage nor formulate a response.