Texas Compression: A series examining the high cost of high growth in North Texas.
Homebuilders are holding back construction as higher mortgage rates turn buyers away.
Builders began construction of 14,871 new homes in the second quarter, down 7% from the first quarter’s record 16,012 housing starts, according to Dallas-based Residential Strategies Inc., a research and monitoring firm. council that follows the activity of the new houses.
“As we’ve gone through the past three months and traffic and sales have moderated, builders are changing their approach to the market,” said Ted Wilson, director at Residential Strategies.
Wilson expects construction to start slower in the third quarter as builders realize the faster pace of recent months is not sustainable. They still face labor and supply chain issues that have lengthened the time it takes to build a house.
Over the past eight quarters, builders have started building almost 22,000 more units than they have sold.
“While many D-FW builders had ambitious growth plans during the period of low mortgage rates and increased demand, the reality is that limited construction capacity has restricted builders’ ability to complete and close homes” , Cassie Gibson of Residential Strategies. said in a statement.
Buyer sales traffic fell significantly in the quarter, with June sales activity between 30% and 35% of April levels, the company found through anecdotal field reports from builders.
The average rate for a 30-year fixed-rate mortgage fell from a record low of less than 3% in 2020 and 2021 to 5.3% as of July 7. This could add hundreds of dollars to buyers’ monthly payments. Home lending activity for new purchases in Dallas-Fort Worth fell about 20% year-over-year in the first quarter, according to Attom Data Solutions
Although there are fewer potential buyers in the market, there are still enough in a position to buy that builders generally haven’t had to cut prices.
“There will be a limited amount of [price reductions]but builders still make pretty decent margins,” Wilson said.
Many builders are buying out or locking in mortgage rates to help potential buyers secure financing. They can also cover closing costs.
“The era of ‘take it or leave it’ is kind of over,” Wilson said. “Builders will work with you to make sure you find what you want.”
In the past two years, when interest rates were low, homebuilders sold homes later in the construction process since everything they built sold. Wilson said he now expects builders to resolve the backlog of homes they’ve already started and then start building accordingly.