Demand for new construction, long a housing market bright spot, is quickly weakening

For years, homebuilders were relatively insulated from the deep slump the rest of the housing market faced. But now, they too are feeling the pinch of an underwhelming spring homebuying season — and scrambling to adjust.

New home sales plummeted 14% in May from a month earlier as high prices, elevated mortgage rates, and economic concerns kept buyers away. Thirty-seven percent of builders reported cutting prices in June to help move a growing backlog of supply. Publicly traded homebuilders Lennar (LEN) and KB Home (KBH) both highlighted slower market conditions in their second quarter earnings reports.

Many builders are now pulling back on future development plans.

“Consumers grew increasingly apprehensive about the economy and rising geopolitical tensions, driving consumer confidence to a 13-year low. As a result, the housing market cooled,” KB Home President and COO Robert McGibney said Monday on a call to discuss earnings. The company cut prices in some markets in response, but the move hasn’t resonated with consumers.

“Despite these actions, demand weakened,” he added.

And now, homebuyers have more choices. Builders are sitting on the biggest pile of completed, unsold inventory since 2009 — and have the most single-family homes for sale since 2007. Meanwhile, existing home listings have spiked 30% from a year ago. In a growing number of markets, there are now more homes for sale than there have ever been before. But in most regions, neither new nor old homes are selling quickly.

“The resale market has finally woken up, but woken up in a bad way, meaning a lot of supply but not too much demand,” said Rick Palacios Jr., director of research at John Burns Research and & Consulting, a housing market research firm. “It’s not a shocker that home builders are very quickly re-sizing their businesses.”

Read more: 2025 housing market: Is it a good time to buy a house?

Boom times end

Builders are now cutting back after a boom period that started during the pandemic. Amid the homebuying frenzy of 2020 and 2021, they rushed to buy up land and construct new communities, especially in fast-growing, moderately priced parts of the country like the Southeast and Mountain West. At a time when older homes were scarce and bidding wars were common, the gambit worked: The S&P Homebuilders Select Industry Index surged 134% between October 2020 and October 2024, its peak.

A dramatic jump in mortgage rates in the middle of 2022 cooled activity in the resale market, but builders found ways to maintain new home sales by buying down mortgage rates. If homebuyers looking at existing homes were finding rates about 7%, builders could offer temporary or permanent rate reductions to below 5% if buyers used an in-house or partner lender. They were also able to quickly adjust to market conditions by building smaller, cheaper homes.

Read more: When will mortgage rates go back down to 6%?

Recently, as mortgage rates and prices have stayed stubbornly high, new construction supply has begun exceeding demand. At first, inventory began to pile up in onetime pandemic relocation hotspots like Texas and Florida. But the weakness is now spreading throughout the country, Palacios said. Even builders in parts of the country like California, where housing supply is severely constrained, are now reporting a slowdown. The S&P homebuilder index has slumped 22% from its late 2024 peak.

To keep homes moving now, builders are dangling bigger incentives to buyers. In Orlando, Fla., Realtor NyAsia Baker says rate buydown offers to 3.99% to 4.99% for the life of the loan are now common, when in years past those types of offers were temporary — only good for the first few years of a typical 30-year loan.

Some builders are also offering up to $35,000 into so-called “flex cash,” which buyers can apply to closing costs or upgrades, compared with $5,000 or $10,000 a few years earlier.

“Deals right now are kind of out of this world,” Baker said. She primarily works with buyers and stayed busy this spring as Orlando’s market shifted in their favor. “New construction incentives are definitely helping with that.”

Many of Baker’s buyers come in open to considering new builds and existing homes, but end up choosing new construction for the deals. In Atlanta, Realtor Worrell Thomas has seen a similar pattern, especially among first-time buyers who often find themselves discouraged by the high prices and stubborn sellers they find on the resale market.

“A lot of sellers right now are still stuck in the pandemic pricing,” Thomas said.

Builders, meanwhile, are more willing to negotiate.

“It’s definitely weak. They’re throwing all types of incentives out there to attract people to purchase,” he added.

Read more: How to buy down your mortgage interest rate

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Short-term deals, long-term shortage

While today’s supply glut and incentives can mean cost savings for buyers now, they come with more troubling implications for the country’s longer-term housing supply. Housing economists estimate that the country has a shortage of somewhere between 1.5 million and 4.5 million homes. And with demand weak now, builders aren’t rushing to start new construction processes like acquiring more pricey land and working with local governments to secure building permits.

Housing starts plunged to a five-year low in May, to a seasonally adjusted annual rate of 1.25 million homes. Building permits, a preliminary step in the construction process, were also down.

“It’s definitely not what we love to see,” said Hannah Jones, senior economic research analyst at Realtor.com. “In the medium to long term, we’re not likely to see home prices come down much and affordability improve much on a national scale.”

There’s little evidence that builders will change their tone anytime soon. Builder confidence in June sank to the lowest level in over two years, with reviews of the current sales environment, sales expectations for the next six months, and prospective buyer traffic all falling, according to data tracked by the National Association of Home Builders and Wells Fargo.

But for now, homebuilder pain means bigger discounts for buyers. KB Home cut the high end of its expected average selling price this year, while Lennar said its average prices had hit a five-year low.

Erin Hill, 27, and her husband recently closed on a new construction home in Fort Worth, Texas. They initially looked into existing homes in Denton, where they're from, but found their budget limited them to fixer-uppers, which they hoped to avoid.

After seeing new construction deals online and hearing from a friend who purchased a new build, they expanded their search into those communities, ultimately landing on a 2,100-square-foot, 3-bedroom, 2.5-bathroom home built by Lennar — which bought their mortgage rate down to 4.25% for the life of the loan, offered them free appliances and window blinds, and paid for their closing costs.

"For us financially, it made the most sense," Hill said. Recently, she's been keeping track of the other homes for sale on her street to see when they might be welcoming new neighbors. She's watched some listings linger for a month or longer, and Lennar cut prices in response.

"A lot of the houses on the street were up for week after week after week," she said. "They would knock the prices down and down. They just want them sold."

Claire Boston is a Senior Reporter for Yahoo Finance covering housing, mortgages, and home insurance.

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