Homebuyers aren’t the only ones cancelling signed contracts. So are home builders.
In the wake of slower new home sales, four out of every five land brokers say deals that once worked for builders are no longer penciling out, according to a new report from John Burns Research and Consulting. As a result, builders are either walking away or renegotiating their contracts.
A year ago, the consulting firm says, three out of four land dealers reported strong demand for finished lots and raw ground. Now, a little over one in four are still dealing with hot-to-trot builders. The rest are either backing away or not even answering their phones.
And the Burns firm thinks more builders will also throw in the towel on deals that once made sense.
Why? Because house prices have not been able to keep up with lot prices. While lot prices were up anywhere from 4% to 6%, depending on their location, in the second quarter, house prices dipped by 1%. Consequently, builders are seeing their margins dwindle.
New home sales also were also down even more in July on both a month-to-month count as well as year-over-year. The U.S. Census Bureau says sales fell 0.6% from June and 8.2% from July 2024. On a year-to-year basis, they are now running at a seasonally adjusted annual rate of 710,000.
Furthermore, the seasonally-adjusted estimate of new houses for sale at the end of July was 499,000. That’s 7.3% above the July 2024 estimate of 465,000. From an all-time record low of 3.3 months of supply in August 2020, the unsold inventory has risen to 9.2 months. A four-to-six month supply of unsold houses is considered a healthy market.
However, as competition for land falters, some builders are scooping up lots in ways that don’t carry so much weight on their bottom lines. Less risky options include land banking, delayed take outs, and buying lots over time. Bulk acquisitions, on the other hand, no longer make sense.
