Southern California builders start discounting new homes

Homebuilders this past summer faced many of the same challenges as owners trying to sell their houses — buyers balking at high prices and even higher mortgage rates.

The number of completed new home sales in Los Angeles and Orange counties in 2022’s first eight months was 20% below the previous year’s pace, according to CoreLogic data. Builder sales fell 8% in the Inland Empire.

The sales slump will continue, according to Zonda, which tracks sales contracts for new homes. L.A.-O.C. pending sales were down 19% in the year ending in August, according to the data. I.E. contracts were down 45%.

As a result, local builders cut their monthly pace of pulling building permits in July and August by 21% compared to the year’s first half, the busiest start of a year since 2007.

Ali Wolf, Zonda’s chief economist, says some of the dip can be tied to pricier financing, which is scaring off house hunters. But this summer’s lull also reflects buyers who might have waited to buy but purchased a home ahead of schedule last year to grab 2021’s cheap financing.

She thinks significant pent-up demand remains for housing from people who were unable to find a home in last year’s buying binge. She also says the current buying slump won’t be cured until next year.

Zona Chief Economist Ali Wolf (Courtesy: Zonda)

As a result, we see builders doing what they loathe to do — offer noteworthy incentives to get buyers in the shopping mood.

Q. I recently saw a promotion from a homebuilder: Buy now and get a 5% mortgage during a week in which rates overall averaged 6.7%. Such a discount probably cost the builder 2% or more of the purchase price, but it lets the builder report a sale at or near “full” price, yes?

Wolf: The majority of new home communities across the country are offering some kind of incentive to home shoppers today. Mortgage rate buydowns, extended rate locks, money toward options and upgrades, and funds toward closing costs are the most common.

If an incentive is effective enough to encourage buyers to return to the market, then builders will keep prices flat. That’s what our data at Zonda shows. Most builders held prices flat but roughly 30% did drop prices.

Remember, price drops in the new home market can start a vicious cycle, given all the buyers with signed contracts in the production backlog.

Q. Why the discounting?

Wolf: The builders that dropped prices said there were three main reasons why they did it: 1. Their competitor did. 2. They have standing inventory they are trying to sell quickly. 3. Demand has slowed enough that they felt they needed to lower prices to entice buyers.

And 40% of builders said they saw a rebound in demand when they dropped prices. These price cuts generally averaged over 5%.

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Q. So we see incentives in the builder world and also see in the existing home market the return of buyers getting sales deals with contingencies and repairs, etc.

Wolf: On the resale side, buyers can and should keep their protections today via contingencies. Power has returned to home shoppers where they can wait longer to put in an offer, offer below list price, and keep their contingencies.

Q. Am I wrong to suggest that prices are already falling sharply, we just can’t see it?

Wolf: I don’t think falling home prices are widespread yet, but there are absolutely pockets of Orange, Los Angeles, Riverside and San Bernardino counties where we have seen a drop in overall values.

But I do agree with your assessment that pricing data that is looking at closing transactions vs. contract sales are missing how quickly the market has shifted and that home prices have started to come down in parts of Southern California.

Jonathan Lansner is the business columnist for the Southern California News Group. He can be reached at jlansner@scng.com