2023 Isn't Turning Out to Be Nearly as Tough as Home Builders Expected

The economic landscape for home building in 2022, which was characterized by the Fed's efforts to fight inflation with monetary policies, rapidly increasing construction material and labor costs, supply chain issues, skilled labor shortages, and anticipation of an economic recession during the first half of 2023, set the stage for builders' expectations for 2023. And, understandably, the outlook wasn't rosy. But while the forecast for 2023 was for a 30% drop in home sales based on the decrease in sales during the Q4 2022, by June of this year, actual new-home sales were down just 2.8% from last year, which wasn't nearly as dramatic a drop as anticipated, according to Shinn Builder Partnerships, a management and consulting firm for the home building industry.

As the housing market softened during the second half of 2022 due to high interest rates, there was an increase in unsold inventory. The cost of construction receded, and construction schedules began to return to normal due to improvements with both the supply chain and skilled labor availability.

Concerned about sales cancellations, liquidation of unsold inventory, and future sales due to the rise in mortgage interest rates and affordability issues, builders began offering buyers incentives of mortgage rate locks, mortgage rate buydowns, home price discounts, and free upgrades. Because of the reduction in construction costs, builders had strong margins and were able to offer incentives totaling as much as $50,000.

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