In Market Talktrack, Uncertainty, Even Concessions Crop Up

A summer of uncertainty has settled across active homebuilding markets in the U.S., like a naggingly warm blanket.

The feeling something beginning to shift in the business environment brings to mind an unforgettable line Ernest Hemingway coined in “The Sun Also Rises” to help the uninitiated get how a character of his went broke.

Roughly two-thirds (64%) of first-time buyers put less than 20% down on their first home, according to the 2020 Zillow Group Consumer Housing Trends Report, and a quarter put down 5% or less. Less than half of first time buyers said they saved the majority of their down payments themselves, meaning the rest used alternate means including gifts and loans from family and friends or tapping into retirement accounts and investments to come up with their down payments. But not everybody has those opportunities. Black and Latinx home buyers were more likely to say they saved at least some portion of their down payments themselves compared to white home buyers, illustrating some of the disparities in how households are saving up for their American dream.

Saving is really the only option for those first-time buyers without the luxury of relying on gifts and investments for a down payment, and it’s becoming increasingly more difficult as home prices soar. For renters making the median U.S. renter income (as of March 2021) of $3,855 per month and putting 2.4% of their income into savings (the median rate for renters), it will take a whopping 26.8 years to save for a 20% down payment on today’s typical starter home, priced at $148,527. That number seems high, and it is — but the good news is that 20% isn’t required. The down payment on most conventional loans can be as low as 3%, bridging the time needed to save for an adequate down payment on a typical entry-level home under the same assumptions down to just  down to 4 years.

The issue here is how much of new homebuilders’ product and community mix – which has shifted bigtime in the past five years or so – exposes itself to Federal Housing Administration mortgage limits to try to position product to first-time buyers.

What’s happened with recent input price inflation, surging land costs, and spiralling local regulatory burden, is that builders in some markets that had up to now enjoyed headroom between their product pricing and FHA loan limitations are increasingly at risk of breaking through those caps.

Whether or not it’s the demand pool that’s taking a pause – or builders, and whether or not it’s tilting toward time for concessions to keep sales per month per community pace where it needs to be remain uncertain.

That’s why the Summer of ’21 feels like a too-hot blanket right now, and why the one metric builders really don’t want to have to begin keeping an eye on is cancelation rates.

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