For years, homebuilders have reaped the benefits of a housing supply shortage. But as mortgage rates drop and existing home inventory rises, the tide may be turning. This shift could mark the end of an era for builders who have long held the advantage in a tight market.
The Changing Landscape: Builders’ Advantage Wanes
Recent developments suggest a significant shift in the housing market:
- Rising inventory in both new and existing homes
- Increased competition between new builds and resale properties
- Builders cutting prices to move inventory
Phillippe Lord, CEO of Meritage Homes, acknowledges the changing dynamics:
“I don’t think we’re going to be immune to the market as the resale market starts to return and becomes more competitive.”
Builders’ Performance: Signs of Struggle
Recent reports from major homebuilders reveal some challenges:
- Meritage Homes (MTH):
- Total home orders up 14% year-over-year, but below analyst expectations
- Average sales price on orders down 6% from a year ago
- Toll Brothers (TOL):
- Quarterly orders up 11% year-over-year, but missed analyst forecasts
- Orders per community fell 2% on a yearly basis
The Luxury Market: Not Immune to Changes
Even luxury homebuilders like Toll Brothers are feeling the effects:
- Affluent customers showing caution despite lower mortgage rates
- Toll Brothers warning of potential 10% drop in fourth-quarter orders
Douglas Yearley, CEO of Toll Brothers, remains optimistic about long-term prospects:
“Even as interest rates move lower, we believe the supply of homes will remain challenged due to nearly 15 years of underproduction.”
Investor Sentiment: Still Bullish on Builders
Despite challenges, investor confidence in homebuilders remains strong:
- SPDR S&P Homebuilders ETF (XHB) up over 19% this year
- Toll Brothers stock up 37% in 2024
- Both outperforming the S&P 500’s 17.5% gain
The Impact of Falling Mortgage Rates
Recent declines in mortgage rates could level the playing field:
- Easing the supply-demand mismatch that favored builders
- Encouraging more existing homeowners to sell
Carl Reichardt, BTIG’s managing director and homebuilding analyst, notes:
“[Homebuilders] haven’t had to really lever [their value proposition] because they were the only game in town for so long. And now they’re going to have to think about it.”
Signs of a Market Shift
Evidence suggests a gradual transition in the housing market:
- Total housing inventory up 23.4% year-over-year in June
- Homes staying on the market longer
- Sellers receiving fewer offers
- More buyers insisting on home inspections and appraisals
Lawrence Yun, NAR chief economist, observes:
“We’re seeing a slow shift from a seller’s market to a buyer’s market.”
Looking Ahead: Strategies for Builders and Buyers
As the market evolves, both builders and buyers may need to adjust their strategies:
- Builders: May need to focus more on competitive pricing and unique value propositions
- Buyers: Could benefit from increased options and potentially more negotiating power
- Investors: Should monitor how builders adapt to the changing landscape
- Market Watchers: Keep an eye on inventory levels and mortgage rate trends
The housing market appears to be at a crossroads. While homebuilders have enjoyed a significant advantage in recent years, the combination of falling mortgage rates and increasing existing home inventory is reshaping the competitive landscape. As we move forward, the ability of builders to adapt to these new market conditions will be crucial in determining their continued success and the overall health of the housing market.
