Home prices crack US builder foundations

The U.S. real estate market is putting a fresh spin on flipping houses. New homes are selling for less than existing ones, with the 10% median discount in June marking the widest gap on records going back almost 60 years. As mortgage rates sit at a near two-decade high, builders are discovering that affordability demands the same careful engineering as a load-bearing wall. Interest rates have long been considered the biggest threat to residential construction. They may instead put up useful "For Sale" signs in the equity market. As financial incentives become a fixture in new homes, the trick is installing them without cracking the builder's foundation. **Context news:** - U.S. home values fell roughly 3% in May on an inflation-adjusted basis, representing the 12th consecutive month of decline, according to S&P Dow Jones Indices data released on July 28. - Builder D.R. Horton on July 21 trimmed its full-year revenue forecast, while rising costs and incentives it provided to buyers facing higher interest rates weighed on its third-quarter profit margin. In an incentive-driven market, size becomes a competitive weapon. Large builders can reach deeper into balance sheets, flex purchasing power and use captive mortgage services to finance concessions that smaller rivals struggle to match. They also spread the cost of qualifying buyers across tens of thousands of homes. Even with those advantages, profitability requires disciplined land acquisition and finding American Dream seekers able to shoulder higher costs without lavish inducements. Toll Brothers TOL.N and PulteGroup PHM.N, worth a combined $40 billion, have focused on wealthier customers in more resilient markets like New York and North Carolina, selling the priciest homes among large publicly traded developers. Theirs are the only two stocks, among the top seven builders, whose prices have outpaced the S&P 500 Index .SPX over the past five years. Homeowners clinging to loans they secured when money was much cheaper are helping consolidate market power. Sales of older residences have stayed flat, pushing more buyers toward new homes. The 10 largest companies by sales now account for 44% of freshly started construction, up from roughly 30% before the pandemic, according to the National Association of Home Builders. Mortgages costing more than 6% annually have sidelined many prospective buyers, however, even as inventory grows. The supply of unsold new homes exceeds nine months, the highest level outside the pandemic or a recession. As a result, they are increasingly difficult to sell. Owners have modestly slashed prices, while paying fees to help lower mortgage rates and providing closing-cost assistance, all of which squeezes the bottom line. Gross margins at the seven largest U.S. home builders are expected to fall to about 22%, on average, in their respective 2026 fiscal years, according to Visible Alpha, well below the 29% peak in 2022.

Home prices crack US builder foundations

U.S. home prices are squeezing builders

Rates may be a warning sign for builder stocks

Scale and customer mix are becoming advantages

Higher rates and growing inventory pressure margins

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