What is normally a ho hum report became more important this morning as the sales of new homes came in hot, hot, hot.
The forecast was for sales of 680,000 units but the actual came in at 759,000—way stronger than us that are looking for economic news that is friendly to interest rates.
The 10 year popped to 4.92% before setting back a basis point or two.
You have to tip your hat to the homebuilders as they find innovative ways to lure folks in to overpriced houses with short term interest rate buydowns etc.
Funny how the market is repeating the same things that got builders, suppliers, and labor like sub contractor and of course the borrower in trouble the last go round.
BMC ( Boise Cascade) in the late 70’s early 80’s Del Webb retirement communities and others left suppliers and sub contractors with late pay or no pay when subdivisions shut down and cabinet makers, plumbers and electrical supply houses, roofing supply companies had already brought in stock.
I had a realtor in early 80’s who was both the builder and developer who offered to sell me a condo interest only first 2 years when a regular 20/80 mortgage was at 12%. Years later after all the buyers lost them and the builder took them back they were turned into rentals.
Builders respond to supply and demand. But by the time their houses are built a year or two later the market may have changed. Always a risk that they are behind the curve.
The homebuilders are playing with fire, as they are the lender as well, with that below market interest rate that makes the mortgage impossible to securitize, so while they book the immediate profit from selling the home, they have that ticking time bomb of the note sitting in a subsidiary where the losses will be borne by the home builder if the homebuyer gets into financial distress. And this seems to be what is happening for 20-30% of the new home construction…
I don’t understand this, aren’t they just paying points? Are you saying they are actually holding the mortgages?
David:
My understanding is that the public homebuilders are just paying thousands of dollars to buy the mortgage rates down for their buyers from 8% to 5.5%.
So it is eating into their profit margins big-time. A $400K mortgage would cost a builder like LEN $10K+ to buy down those points.
I have longer term put options on some of the builders and they are finally starting to trade in-the-money. Personally, I have had a horrible experience with LEN. My wife and I sold our bigger home in 2022 and traded down and bought a new LEN home less than a year ago – and I have put in 30+ customer care requests for repairs in the last 10 months.
The experience has so soured me that I never plan on buying a brand new home again. Shoddy construction to say the least.
Justin, In my hometown in TN, these homebuilders dominate and are the only game in town. Competing builders, real estate agents, mortgage origination, etc. have all lodged complaints with the local government. Put pressure on them.
The workaround is now that the big builders no longer buy raw land. Rather they allow local folks to buy and receive all entitlements. Then the local property owner flips with a nice profit. My family recently did this with an old farm we held. I had no idea of the efficiency of these builders. They own their own sheetrock, brick, flooring companies. Very little outsourced. They do have to offer local buyers the option to finance elsewhere, etc. but of-course none can compete. We are seeing no housing distress here in TN. Rather inventory cannot keep up with the influx of northerners’ and CA folks. Sigh.
Builders selling new homes with large discounts or extras , have to see how existing homes sell and for how much. Prices may start waterfall down
I suspect part of this is because the inventory of existing homes on the market is at extremely low levels
In my neighborhood in PA there are no homes on the market. My daughter has a friend who wants to buy into our neighborhood. A house a few doors down went on the market, she put a full price offer in with inspection contingency the first day and didn’t get it because someone put a full price offer with no inspection contingency in.
People are not moving like they have been because of mortgage rates being so high. Why sell and give up your 3% mortgage when you mortgage rates are now 8%
So the new home builds are providing the main supply for those who have no choice but to move / new home buyers
I can see the logic of buyers in many cases. You can buy a home 30 plus years old without more modern insulation, possibly dated aspects, a basement not as nicely done, older mechanical aspects like heating/cooling which costs more to operate, etc…
or you can get a brand new drywall/vinyl siding princess that will most likely cost less to operate long term and it is ready to move in. You can also possibly customize it a bit before you take it over.
With that said.. not sure how many of you check out new builds but in my area they are built quick and little details like air sealing from the environment are often rushed and poorly done as an example at penetrations, vinyl siding aspects like lighting on the home are done cheaply/ugly, and small decks are slapped on with very little utility.
But even with all that.. i can see the appeal to buyers for specific reasons. Oh yea.. and the garage faces front. So ugly. 1/3 or more of your home is front facing garage doors. Welcome to suburbia.
Ain’t that America, home of the free…little pink houses, for you and me.
or going waaaaaaaaaaaaaaay back,
Little boxes on the hillside
Little boxes made of ticky tacky
Little boxes on the hillside
Little boxes all the same
There’s a pink one and a green one
And a blue one and a yellow one
And they’re all made out of ticky tacky
And they all look just the same
Marry the home and date the rate.