When pricing power disappears, builders have to find margin upstream

Affordability remains strained as elevated mortgage rates and construction costs continue to weigh on potential buyers. Those pressures have left builders relying heavily on incentives and price reductions to sustain sales and absorption. The National Association of Home Builders (NAHB) reported in September that 66% of builders were using sales incentives, the highest share since December, while 38% were cutting prices. The average price reduction remained 6%. Inventory adds another layer of pressure as it remains elevated. Census Bureau data shows 488,000 new homes for sale in July, representing 9.6 months of supply, while sales were down 6.3% year over year. Together, those trends leave less room for homebuilders to protect margins by simply raising prices. Increasingly, builder margin protection depends on looking further upstream at the cost, complexity and time embedded in the product itself. There is only so much builders can solve at the sales floor Builders cannot control mortgage rates, buyer confidence or many of the external costs affecting construction. NAHB’s Q2 affordability data found that a median-income household would need to devote 34% of its income to the mortg...