Rising existing-home inventory is thwarting homebuilders, who are now slowing permits and starts — and backing off from hefty incentives.
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Homebuyers in the existing-home market might have a slight edge over those looking for new homes, according to the National Association of Home Builders (NAHB).
The association released its latest NAHB/Wells Fargo Housing Market Index (HMI) on Tuesday, which revealed that homebuilders are retreating from price cuts and other sales incentives that boosted new-home affordability last year. The share of builders who used incentives in the past month was flat, staying at 65 percent. Of those who used incentives, only 36 percent said those included price cuts — down from 40 percent in the three previous months.
The index is based on a survey of homebuilders and is meant to “track the pulse of the single-family housing market,” according to NAHB.
Homebuilders were quite pessimistic about the immediate future, with the index for six-month sales dropping from 50 to 46 points. The index for new-home buyer traffic fell, too, dropping from 24 to 22 points. The culprit? Lingering uncertainty about the economy, negative media reports, and buyer expectations that prices and rates are poised for a decline.
The industry’s growing skittishness was reflected in the U.S. Census Bureau’s Wednesday release of its Monthly New Residential Construction report, which covered trends for November and December.
November showed some promise, with new housing starts edging up 2.1 percent year over year. However, the following month brought notable losses, with new housing starts declining 7.3 percent year over year. Permits didn’t fare much better, dropping 8.0 percent year over year in November and 2.2 percent in December.
Bright MLS Chief Economist Lisa Sturtevant said an uptick in existing inventory has cut into the new construction market, with homebuyers more apt to find what they want in the resale market. As a result, she said builders will be more “cautious” during the first quarter, waiting for spring to up the ante.
“Despite lower mortgage [rates], homebuyers were holding back during the fourth quarter,” she said in a statement. “Affordability and economic uncertainty remain constraints on homebuyers’ willingness to get into the market. More existing inventory has also made new construction less of a draw in some markets.”
“As buyers show signs of returning to the market, it is likely we will see new construction increase this spring,” she added. “Even as demand improves, builders face challenges on the supply side. A lack of construction labor, elevated land costs and often wide-ranging local regulations will continue to make it challenging to build new housing, particularly housing at lower price points.”
NAHB Chief Economist Robert Dietz provided a bird’s-eye view of the new-home market at the International Builders Show, saying that homebuyers will likely experience better affordability in the existing-home market this year.
“We expect in most markets this year, resale prices to go down in order to improve affordability conditions, because existing homeowners now have to do the price discovery that builders have been doing since 2022, and they haven’t done it yet,” Dietz said Wednesday in a statement. “So we think that’s happening in 2026 and of course, it’s needed, because when we look at the home price to income ratio.”
Dietz said the typical home price is 4.9 times the typical income, reflecting the ongoing challenge of closing the gap between wage and home price growth.
Although the coming months include headwinds, the NAHB chief economist said homebuilders are resilient — offering smaller floor plans at more affordable price points. The typical floor plan is 5 percent smaller than it was in 2022, he said, helping to drive median new-home prices down by 15 percent during the same time period.
However, he said there’s still much more to do to help younger homebuyers enter the market.
“Historically, home prices to incomes, the 3 to 1 ratio, that was a well-understood rule of thumb that had been around for a while,” Dietz added. “When the price-to-income ratio is 5 to 1, it’s harder for those younger households to save up, whether it’s the 3.5 percent for an [Federal Housing Administration] mortgage or a 10 percent down payment on a conventional mortgage.”
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