Builders Dish Out Discounts as Buyer Demand Dries Up

Mortgage applications are falling close to 40% year-over-year, cancellations by property developers are on the rise, and builder confidence is at a 10-year low thanks to mortgage rates surging beyond 7%, according to Realtor.com. KB Home reported a 35% cancellation rate in the third quarter of 2022, while Lennar saw cancellations on 21% of its orders and Meritage Homes reported a 30% cancellation rate.

Some builders are offering discounts and incentives to buyers in order to complete sales, while others contending with big backlogs are offloading inventory into the build-for-rent market.

As a result, builders have had to get more creative with incentives, including rate locks, rate buydowns and upgrades on kitchen appliances, [John] Lovallo said.

Has it worked? “We’re starting to see some demand elasticity, which is encouraging,” Lovallo said. “There is a tremendous amount of underlying demand for housing that’s still out there.”

While home builders are struggling, larger builders are “faring better,” he said, noting that a builder like D.R. Horton has better economies of scale. “They’re going to be able to buy commodities in bulk [and] have access to capital markets,” he said. “So the larger builders are absolutely in a better position.”