Key facts
- Homebuilders are focusing on upstream cost and complexity to protect margins due to strained affordability.
- 66% of builders used sales incentives in September, the highest since December.
- 38% of builders cut prices by an average of 6% in July.
- New home inventory stood at 488,000 units in July, representing 9.6 months of supply.
- Material costs for new homes increased by a median of 6.7% year-over-year in July.
- Regulatory requirements account for 26.4% of new home prices, up over 40% since 2021.
Homebuilders are facing significant pressure on their margins due to persistent affordability challenges, forcing them to look beyond price adjustments and incentives to control costs. Elevated mortgage rates and rising construction expenses continue to deter potential buyers, leading builders to rely on discounts and other sales tactics to maintain sales volume.
The National Association of Home Builders (NAHB) reported that in September, 66% of builders were offering sales incentives, the highest proportion since December. Additionally, 38% of builders were reducing prices, with the average cut at 6% in July.
Inventory levels remain a concern, with 488,000 new homes available for sale in July, representing a 9.6-month supply. This, coupled with a 6.3% year-over-year decline in sales, limits builders' ability to pass on costs through higher prices.
Builders have limited control over external factors such as mortgage rates and buyer confidence. The NAHB's second-quarter data indicated that a household with median income would need to allocate 34% of its income to a mortgage payment for a median-priced new home. Furthermore, material costs have risen, with the NAHB reporting a 6.7% median increase in July.
To combat these pressures, builders are increasingly focusing on upstream decisions related to product design, complexity, and time efficiencies. Standardizing repeatable elements of home plans, while still offering buyer choice, can help reduce costs associated with estimating, purchasing, permitting, and construction. Earlier visibility into design decisions can also minimize redesign and rework.
The NAHB estimates that regulatory requirements now add $131,734, or 26.4%, to the price of an average new single-family home, a figure that has increased by over 40% since 2021.
Fragmented information systems can hinder efforts to find efficiencies, as disconnected data between design, purchasing, sales, and construction teams can lead to downstream costs not being apparent until later in the process. Treating home information as shared data can improve cross-functional visibility and decision-making, enhancing operating flexibility.