Homebuilders Offer Best Incentives Since COVID

Homebuilders are doing just about everything they can to make a sale. Buyers remain scarce.  

In fact, builders are offering the most sales incentives in five years, according to the National Association of Home Builders’ (NAHB) monthly confidence index data released Monday, which also showed that builders’ confidence in the market is now at its lowest level since late 2022. Both builders and buyers, however, may take solace knowing that the Oracle of Omaha, in one of his final prophecies, foresees upside for the sector.

Buffett-Backed Real Estate

Just how desperate are homebuilders to move inventory? A full 37% have slashed prices this month, down ever so slightly from 38% in July — the highest figure since the NAHB started tracking the data in 2022. In both months, the average price reduction was 5%; that comes after the median sale price of existing homes hit an all-time high earlier this summer, according to the National Association of Realtors. Some 66% of builders are offering sales incentives in some form or another, up from 62% last month and the highest since the COVID-19 pandemic.

Worse, “builders are also grappling with supply-side headwinds, including ongoing frustrations with regulatory policies connected to developing land and building homes,” NAHB Chairman Buddy Hughes said in Monday’s report.

Still, Berkshire Hathaway revealed in regulatory filings last week that a handful of key homebuilder stocks were among Buffett’s final plays. He’s hardly alone in anticipating a rebound:

• During the first half of the year, Berkshire invested nearly $800 million in shares of homebuilder Lennar as well as roughly $300 million in homebuilder DR Horton; Lennar and DR Horton are two of just four homebuilders in the S&P 500. Berkshire also reported an approximately $857 million stake in Nucor, America’s largest steelmaker.
• Meanwhile, a MarketWatch analysis of 18 homebuilders’ stocks in the S&P Composite 1500 Index showed the group climbed 21% from the end of June through the end of last week, while the iShares US Home Construction ETF is up over 15% in the past month.

Deep Cuts: So why the optimism? Demand-side softness is due almost entirely to one thing: affordability (or lack thereof), and a timely September rate cut from the Federal Reserve could help reduce prices for builders and buyers. The average rate on a 30-year fixed-rate mortgage fell to 6.58% last week, according to Freddie Mac. That’s the lowest since October of last year and down from recent 7% highs. CME Group’s FedWatch tool shows traders are penciling in an 83% chance of a quarter-point rate cut at the central bank’s meeting in September, which could nudge mortgage rates down even further. Be careful, Jerome Powell: Disappointing the president is one thing, but the wrath of frustrated millennials may be even worse.