Why homebuilders are in panic mode

Rising rates and low demand are causing builders to sell their inventory to investors in bulk.

A year ago, the housing market was so frothy that one aspiring homeowner offered to name their firstborn child after the seller if their offer was accepted (it was not).

Why homebuilders are in panic mode

Today, builders are having such a hard time finding buyers that they’re turning to investors, offering multiple homes at bulk discounts, per The Wall Street Journal.

What happened?

Mortgage rates have jumped from 3.01% a year ago to 6.7% last week, a 15-year high, sparking two big consequences:

  • Demand for mortgages dropped 29% YoY in September.
  • Builders are increasingly skeptical that family buyers will get approved for financing, leading them to seek other options.

One of those options is selling to investors, who can often buy homes in bulk at a 10% to 15% discount. But given the current lack of demand, some builders are offering discounts as high as 20% for investors to take inventory off their hands, per WSJ.

And it could get much worse

Two trends paint a grim picture for builders going forward:

  • Homes under construction were up 14% YoY in August, meaning supply is going up while demand goes down.
  • Investor purchases are already down, and increasing rates make financing these homes even more expensive.

This could lead to steeper discounts as builders struggle to find buyers.

More importantly, the fallout could have a lasting impact on first-time buyers: If investor purchases increase, it will both reduce inventory and keep prices high, making a daunting housing market even harder to break into.

New call-to-action

Related Articles

Get the 5-minute news brief keeping 2.5M+ innovators in the loop. Always free. 100% fresh. No bullsh*t.