Economy Has Builders Decreasing Prices, Increasing IncentivesDecember 13th, 2022 by Editor
Earlier this month the National Association of Homebuilders (NAHB) confirmed what some commercial media outlets have reported recently: builders are increasingly reducing prices and offering special sales incentives. It’s not a new tactic, and while it’s been used before, the NAHB reports that those measures currently are not being used at the same rate at which they were deployed during the Great Recession of 2007-2008.
The association pointed out that in November 2022, 36% of single-family homebuilders reported price reductions, and 59% were offering special sales incentives. These percentages, the NAHB said, have steadily been growing since July, when 13% of builders reported that they had reduced home prices during the previous month to bolster sales and/or limit cancellations.
“According to the FGIA 2021/2022 Study of the U.S. Market for Windows, Doors and Skylights, the residential market is expected to level off and experience a slight decline in 2023 and 2024,” says Janice Yglesias, Fenestration and Glazing Industry Alliance (FGIA) executive director. “The residential fenestration and glazing industry saw an increase in both new construction and remodeling/replacement following the pandemic; therefore, it is expected that there will be a decrease after this peak in the market.”
However, the FGIA study indicates that remodeling and replacement activity will balance the forecasted decline in new construction for future years.
Those numbers, while elevated, still fall short of the high-water mark recorded from May 2007 through March of 2008, during which, the NAHB reported, the share of builders cutting prices was consistently 48% or higher and reached a peak of 59% in October 2007.
Currently, homebuilders who are reducing prices, were doing so at 5% in July and at 6% for the next three subsequent surveys, the NAHB said, which is just lower than the starting point of price reductions during the Great Recession. Prices during the 2007-2008 financial crisis, the average monthly reduction in house price was consistently 7% or higher, and reached 10% in February of 2008.
The NAHB indicated that the use of sales incentives, which includes price discounts but also free upgrades, etc., continues to be a standard business model for many homebuilders and has been on the rise in recent months. For a historical perspective, when the association first asked builders about it in May 1995, A full 74% reported offering sales incentives and the percentage never fell below 50 until July 2022, when it dipped to 43.
NAHB reported that during the latter part of 2022, the share of builders offering incentives increased from 43% in July to 53% in September and 59% in November; those numbers are still now as high as they were during the 2007-2008 Great Recession, when more than 70% of those in the industry were offering incentives, and that number peaked at 86% in December 2008.