Homebuilders Eye First-Time Buyers

Existing Home Shortage

For more than a year, the Federal Reserve has hiked rates to combat inflation. One side effect was an abrupt spike in mortgage rates which, along with still-elevated home prices, dramatically impacted home affordability.

Homeowners are compounding the issue. Many are hesitant to sell because they’ve secured a low-mortgage rate, reducing inventory and leading to a lack of existing homes for sale. As a result, homebuilders have shifted focus toward first-time homebuyers.

Renewed Focus

Ever since the end of the housing boom in the mid-2000s, many builders have been busy building big, expensive residences. If the demand is there, these properties naturally command a higher price and, for the builder, profit. But for the most part, they’re only accessible for existing homeowners looking to upscale, not individuals or couples searching for a starter-pad.

Now that existing owners are staying put, entry-level buyers are a more attractive segment to homebuilders. First-time home owners don’t have a mortgage, meaning they’re not sitting indefinitely on a low fixed-rate. Some homebuilders now consider them an underserved market.

Earnings Analysis

This sentiment was made clear on various home construction company earnings calls this week.

“We have continued offering incentives and reducing the prices and sizes of our homes where necessary to provide better affordability to home buyers,” said D.R. Horton (DHI) co-COO Paul Romanowski. “There is a higher likelihood of the entry-level buyer transacting at this point in time because they don’t have a home to sell,” added PulteGroup (PHM) CEO Ryan Marshall.

On the other hand, most industry watchers doubt there will be a massive surge of modest-sized homes seen. Low inventory and high rates will likely continue to put pressure on the market. Still, this could be a small change that makes a big difference for first-time home buyers.

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