Homebuilders have benefitted from a lack of housing supply in the existing market for years since the pandemic. Now, their advantage may be withering.
Builders over the past few years had been in a hurry to build houses to address the supply shortage in the resale market, as high borrowing costs discouraged homeowners from selling. But now, inventory of both new and existing homes is finally rising and heating up some competition.
“I don’t think we’re going to be immune to the market as the resale market starts to return and becomes more competitive … we’ll have to navigate that just like every other builder,” Phillippe Lord, CEO of Meritage Homes (MTH), told investors and analysts on the company’s second quarter earnings call in late July.
Meritage Homes, the nation’s sixth-largest homebuilder, reported total home orders rose 14% from the prior year to 3,799 homes, still lower than analyst expectations of 3,879 orders.
Read more: Mortgage and refinance rates today: Rates are still below 52-week averages
The hesitancy among buyers also pushed builders to cut prices to move inventory. The average sales price on Meritage orders was 6% lower than a year ago due to product and geographic mix shift impacting growth, executives noted.
Luxury homebuilders are also coming in light in their order count. Toll Brothers (TOL) this week posted quarterly orders that fell short of analysts’ expectations as house hunters remain cautious even with mortgage rates lower than a year ago.
Toll Brothers’ purchase contracts for the three months through July rose by 11% from the previous year, reaching 2,490 but missing analyst forecasts for 2,793.
Toll’s customers tend to be more affluent, with more cash on hand than entry-level buyers. That appetite has helped Toll’s demand remain steady compared to sales levels of other builders. Still, orders per community fell by 2% on a yearly basis.
Executives at Toll Brothers warned that orders tend to have a 10% drop in the fourth quarter compared to third quarter levels, but remained optimistic that demand will snap back.
“There continues to be an underbuilt and aging stock of homes for sale, with the undersupply exacerbated by the lock-in effect of higher rates, which is keeping resale inventory at historically low levels,” CEO Douglas Yearley told investors on Wednesday.
“But even as interest rates move lower, we believe the supply of homes will remain challenged due to nearly 15 years of underproduction. Lower rates alone will not fully address the chronic undersupply of housing.”
And investors seem to be in agreement. The SPDR S&P Homebuilders ETF (XHB) is up over 19% this year against a 17.5% gain for the S&P 500. Toll Brothers stock has done even better, rising 37% in 2024.
Still, the recent decline in mortgage rates could ease the years-long mismatch between supply and demand that has been so advantageous for builders.
“The [homebuilders] think they have a value proposition and that is positive for the consumer relative to the existing housing market,” BTIG’s managing director and homebuilding analyst Carl Reichardt told Yahoo Finance in an interview.
“They just haven’t had to really lever it because they were the only game in town for so long. And now they’re going to have to think about it.”
And some sellers have already ventured back into the market as rates have come down. Total housing inventory at the end of June landed at 1.32 million units — a 23.4% increase from a year ago, per NAR data.
“We’re seeing a slow shift from a seller’s market to a buyer’s market,” NAR chief economist Lawrence Yun said last month.
“Homes are sitting on the market a bit longer, and sellers are receiving fewer offers. More buyers are insisting on home inspections and appraisals, and inventory is definitively rising on a national basis.”
Dani Romero is a reporter for Yahoo Finance. Follow her on X @daniromerotv.
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