But the worst is the storm can so behind us. At least for builders.
On Wednesday, KB Home reported that the cancellation rate there is 36% in the first quarter of 2023. On the one hand, it is still a rising part of sales in canceled contracts. On the other hand, this is a drop from the 68% level in the last quarter, and a sign that aggressive builder incentives, like mortgage purchases, and reductions in house prices are slowly bringing in buyers.
“As we entered the spring selling season during the quarter, we started to see an increase [housing] request. This reflects in part a targeted sales strategy, along with a stable mortgage interest rate environment. As a result, we achieved sequential increases in net orders in January and February, and net orders remained strong in the early weeks of March. Although there are still high interest rates and economic uncertainty, we are encouraged by this progress,” said Jeffrey Mezger, CEO of KB Home, to investors on Wednesday.
Among the commonly sold home builders, KB Home is the hardest hit with so-called home improvements. The reason is that KB Home has a high concentration of new housing communities in the overheated Western market where the housing correction is very clear.
Why is KB Home’s cancellation rate dropping so fast?
Here’s the long answer: During the Housing Boom Pandemic — a time with unlimited housing demand — builders like KB Home profited by quickly raising the price of new homes. What’s useful: When the housing market collapsed last year, builders like KB Home had breathing room to reduce margins (i.e. reduce prices and/or buy aggressively) to find a market, or a price point that buyers want. will return.
The drop in KB Home’s cancellation rate suggests that the builder is “finding the market.” And the company isn’t alone: Homebuilders across the country are seeing cancellation rates rise.
Builders reviewed by John Burns Real Estate Consulting in February has an aggregate cancellation rate of 10.8%. That’s a far cry from the peak of 24.6% in October, and only slightly above the 7.3% at the peak of the Housing Boom Pandemic in February 2022.
Simply put: Home cancellation rates have normalized-fast.
“Our gross margin is down … as we adjust the price of new home and home sales [the] backlog into the market to promote delivery and reduce cancellation rates,” Stuart Miller, Lennar’s chief executive, told investors earlier this month.
By offering these incentives and rebates, Lennar’s first quarter gross profit margin on home sales fell from 26.9% to 21.2%.
“Builders have taken the most medicine right now in terms of prices. And we think nationally, home prices—on the new home side, net of incentives—are down about 10% from their peak,” Ric Palacios Jr., head of research at John Burns Real Estate Consulting, said in a video posted in February. “There probably aren’t a ton of runways left.”
Unlike homebuilders, who have to cut prices in order to move unsalable inventory, existing homeowners are usually more resistant to these cuts. That resistance is why existing home prices typically fall in the housing market.
“We still think there’s more [home] The price correction comes on the resale side, though. And the resale market is always stickier to the downside when it comes [home] prices,” said Palacios.
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