In the current mortgage-rate environment, homebuilders are adopting various strategies to maintain steady sales of new houses. As detailed in D.R Horton’s Q3 conference call, some of these strategies include mortgage-rate buydowns, construction of smaller-footprint houses, and “de-amenitizing.”
Although the median price of new single-family homes sold in October fell by 3.1% from September, the effectiveness of implementing these tactics in reducing payments is apparent despite the drop in sales of previously owned homes.
1. Homebuilders, including D.R. Horton, are employing strategies such as mortgage-rate buydowns, offering smaller houses, and de-sanitizing in order to sell more in the current mortgage-rate environment. Monthly payments are becoming a more important determinant for potential buyers looking at affordability.
2. While the sales of new single-family houses fell by 3.1% in October, the new strategies implemented by home builders have helped maintain decent sales rates. In contrast, sales of previously owned homes have significantly dropped due to owners refusing to lower prices.
3. Homebuilders are aggressively competing with sellers of previously owned houses and the rental market. Despite the increased competition, homebuilders still manage to attract first-time buyers who are often focused on buy versus rent opportunities and are not discretionary buyers. Despite the interest rates, these buyers tend to need a place to live rather than already owning a home.
D.R. Horton Slashes Prices, Optimizes Space in New Homes Amid Current High Mortgage Rates
As the housing market grapples with high mortgage rates, homebuilders are having to think on their feet to keep sales active and attractive. One of the industry frontrunners, D.R. Horton, is making headlines with its strategic moves.
The builder is deploying tactics like mortgage-rate buydowns, “smaller product footprints,” and “de-amenitizing” to incentivize buyers.
The Numbers Game
The price tag for new single-family houses fell by 3.1% in October, reaching its lowest point since August 2021. Although the contract prices do not cover mortgage-rate buydown costs and other incentives like free upgrades, they do factor in smaller house footprints and a noticeable dip in amenities.
This unique approach by D.R Horton is somewhat reflective in the housing sector sales. In October, there was a nearly 19% year-over-year increase in the sales of new houses, with 51,000 homes sold. However, the sales are still down 7% from October 2019 figures, indicating work still needs to be done.
Winning the Inventory Battle
New houses under construction and up for sale numbered 449,000 in October, a surplus implying an 8.8-month supply. The abundance of inventory is pushing homebuilders to get creative to shift this stock. Interestingly, homebuilders seem to understand the current market dynamics more than homeowners intending to sell. Homeowners with dreams of selling hold onto the mere hope that “this too shall pass”; meanwhile, homebuilders must persistently build and sell homes regardless of the mortgage rates.
New-Age Battle of the Markets
Homebuilders are not just competing among themselves but are also fiercely challenging previously owned houses’ sellers. Besides, the competition extends to the rental market, including newly-built-for-rent single-family houses.
Lower price points and bought-down mortgage rates can indeed make a significant difference, as proven by the sliding median price of new houses. The drop in the price of new houses has been faster than that of existing houses, closing the gap that was unusual previously.
Strategic Steps by D.R. Horton
On its Q3 earnings call, D.R. Horton shared its plan to maneuver through the stormy mortgage-rate environment. Executives revealed that to adjust to the changing market conditions, they resorted to increasing the use of incentives and reducing the size of their homes. The focus is now on affordability for the buyers. This is achieved via the monthly payment process and introducing smaller product footprints while also “de-amenitizing” the homes.
A significant part of their business is first-time homebuyers who, despite the current high interest rates, are in need of a home to live in. If D.R. Horton can continue to stay competitive with the rental market, capturing the first-time homebuyer market will be a significant win.
Investment Insights for the Housing Sector
For investors, this fresh strategy by homebuilders matters for a variety of reasons. First, the reduced size and lessened amenities in new homes can lead to lower prices, which might increase customer demand, thereby boosting sales.
Second, the concept of mortgage-rate buydowns could attract potential buyers who were previously reluctant due to high mortgage rates.
Finally, the efforts to compete with the rental market demonstrate builders’ intention to attract first-time homebuyers. All these efforts may translate into increased revenues and profit margins for homebuilders, presenting a positive outlook for investors in the housing sector.
Investors are recommended to keep a close watch on D.R. Horton and other homebuilders employing similar strategies, as these could potentially be valuable additions to their portfolios.