Housing MarketMortgage Rates

Here’s how homebuilders are capitalizing on first-time homebuyers

Homebuilders work to create options in today's tight inventory market

The second quarter of the housing market is experiencing a unique set of circumstances that are shaping the real estate landscape. The housing market traditionally experiences heightened activity during the second quarter, with increased listings, buyer interest and home sales. However, a combination of factors such as higher mortgage rates, inflation, rising home prices, lower inventory levels and recent bank collapses have contributed to a sense of uncertainty among purchasers and sellers alike. 

This prevailing hesitancy is reflected in the market, as potential buyers adopt a more cautious approach when it comes to making real estate decisions and sellers adapt their strategies to current market conditions. 

High mortgage rates, low affordability result in low buyer enthusiasm 

The ongoing situation with high mortgage rates has resulted in a decrease in buyer enthusiasm in the real estate market. During the first quarter, 30-year fixed mortgage rates fluctuated between 6.1% and 6.7%. Experts predict that these rates will continue to vary between 6% and 7% throughout the rest of the second quarter. 

The affordability gap continues to widen, making it more challenging for buyers, especially first-time buyers with limited equity, to enter the market. 

If the trend of high rates continues, it is possible that home prices may lower as the year progresses. This could occur as sellers adjust their expectations to align with the changing market conditions, giving buyers slightly more leverage.

When mortgage rates eventually do drop, it often leads to increased activity from buyers who had been waiting on the sidelines, hoping for more favorable interest rates. 

Inventory remains tight 

During the pandemic, one of the main factors contributing to the steep rise in home prices was the limited housing supply. Although inventory levels have increased compared to this same time last year, they are still only about half of what would be considered a balanced market. The rise in inventory can be attributed to homes taking longer to sell once they are listed, as well as a decrease in the number of new listings entering the market. 

This article is part of our ongoing 2023 Housing Market Update series that wraps with a virtual event that brings together some of the top housing experts. The event provides an in-depth look at the top predictions for this year, along with a roundtable discussion on how these insights apply to your business. To register for the on demand version, go here.

According to the National Association of Realtors, the inventory of unsold existing homes reached 1.04 million at the end of April 2023, equivalent to approximately 2.9 months’ supply. Further, the ongoing “lock-in effect,” which continues to discourage households with advantageous mortgage rates — over 70% of borrowers — from listing their homes. This phenomenon is contributing to the limited housing supply, and it is unlikely to change unless mortgage rates decrease in the current quarter. 

Despite these challenges, there is an opportunity for homebuilders in the market. With buyers facing fewer choices in the resale market, many are turning to newly constructed homes, resulting in an unexpected boost in business for homebuilders. Builders are capitalizing on this trend by developing more spec homes and offering additional incentives such as rate buydowns, which are not typically available on existing homes. 

Homebuilders are also targeting first-time buyers who are frustrated by the tight housing market. Some companies are strategically building in less expensive areas and reducing the size of their builds to address issues of affordability. These efforts aim to capture the attention of buyers and provide them with viable options in a challenging market. 

Future outlook 

While the current market conditions have resulted in decreased buyer enthusiasm and intensified competition, experts remain cautiously optimistic about the housing market rebounding. Adjustments in seller expectations and potential drops in mortgage rates could create more favorable conditions for buyers. Additionally, the opportunities for homebuilders to cater to changing buyer preferences and address affordability issues provide hope for a more balanced and dynamic housing market in the future.

This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners.

To contact the author responsible for this story:

Russ Stephens at [email protected]

To contact the editor responsible for this story:
Brena Nath at [email protected]

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