Large homebuilders in the US are raising prices as existing homes remain tight

Large homebuilders in the US are raising prices as existing homes remain tight

By Ananta Agarwal

(Reuters) – Listed US homebuilders are raising prices for new construction, taking advantage of the severe shortage of previously owned homes on the market as owners delay upgrading homes due to rising mortgage rates.

Homebuilders are enjoying this turn of events after the second half of last year, when concerns about rising interest rates and slowing demand forced them to cut prices and offer incentives to boost sales.

The shortage has boosted earnings for homebuilders, sending their shares higher, with the S&P Composite 1500 homebuilding sub-index up 41.90% so far this year.

A current average rate of more than 7% on a 30-year fixed mortgage, according to Federal Reserve economic data, compared to less than 5% for 80% of homeowners according to a recent Zillow survey, makes upgrading homes less attractive.

Thus, it puts pressure on the existing pool of homes, which are usually more affordable than new construction.

The number of newly listed homes, of which existing homes typically make up, fell 24.8% in July from a year earlier, according to data from real estate firm Redfin.

Luxury homebuilder Toll Brothers, on a post-earnings call Wednesday, said buyers “can’t find anything” in the resale market, as it reported a sequential price hike of 10% in the quarter ending in July.

Other homebuilders Lennar Corp and PulteGroup Inc raised prices about 1% to 3% from the previous quarter.

On average, generic homebuilders have raised prices in about two-thirds of their communities, BTIG analyst Carl Richardt said.

This comes with the narrowing of the price gap between existing and new homes, following the rise in prices in the resale market.

The median sales price of new homes sold in July was $436,700 compared to the median price of existing homes of $406,700, according to data from the US Census Bureau and the National Association of Realtors.

“Homebuilders usually take prices,” said Matthew Polley, an analyst at Barclays. “When the existing home market sees a price hike, it supports the pricing power of new construction.”

Analysts say room for more price increases and faster construction cycles will continue to push up profit margins for homebuilders in the second half of the year.

“We think we have one more step ahead of us in margins,” Pauli said.

However, as a result of the rebound in new construction prices since last year, “affordability is near its worst level in at least the past three decades,” said James Egan, housing strategist at Morgan Stanley.

Egan added that it fell by 12% in June compared to the previous year, but the pace of deterioration was the slowest since 2021.

This will force homebuilders to remain sensitive to market movement and sentiment among customers, BTIG’s Richardt said, when it comes to the degree of price hikes applied.

(Reporting by Ananta Agarwal in Bengaluru; Editing by Chingini Ganguly)

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