Home Builders Cannot Sell Homes Even With Large Discounts

Today, I'm in Corta Madera, California, walking down Paloma Drive amongst some of the other side streets here. And I want to talk about the major problems that we are seeing in real estate right now, because homebuilders are usually the leading indicator of what's going on in the housing market and where things are headed. And every single month, we keep seeing new reports and new data come out showing us how homebuilders are really struggling right now to sell houses. In fact, a lot of homebuilders cannot sell houses even with large discounts and large incentives for home buyers to move in. Many of these homebuilders are even offering buyers a 4% mortgage rate, and that's not enough to get people through the door. How do we know this? Well, the number of completed but unsold brand new homes has reached levels that we have not seen since the summer of 2009, according to the Federal Reserve Bank of St. Louis. At the end of last year, builders were pretty confident that in 2025, they would be able to sell more homes, so they ramped up building. But here's the thing, the demand never actually caught up. They built a lot of homes, but the demand didn't come with it. And so you can see on this chart here that goes all the way back to the that it is, in fact, the highest amount of unsold homes since 2009. Was it higher in 2009? Yeah, but we are on a pretty fast upward trajectory towards that number. It kind of depends if builders will continue building or if they're just going to put everything on pause. These homebuilders are doing all sorts of things to sweeten the deal, like D.R. Horton, for example. They build one out of every seven brand new homes in the country, and they have their own financing company, and they're offering people 3.99% on a mortgage, and it's not enough. They have also knocked 3% off its average selling price over the past 12 months, and they just announced they expect to cut prices even further going into 2026. No matter how many times they cut prices, no matter how low they bring interest rates down, it just doesn't seem to be enough to get people off the sidelines. America's second largest homebuilder, Lenar, they have been offering incentives worth up to $64,000 on its average home sale as of last quarter in order to meet their sales target, and even that has been tricky to get people to buy. They're also doing a combination of a subsidized mortgage and price cuts, which is equivalent, get this, this is equivalent to a 14.3% price reduction. The last time Lenar had to offer homebuyers such a deep discount was during the GFC. That's a direct quote from Lenar, not me saying this. Take a look at this chart here that also goes back to 2009. The sales incentives as a percentage of their revenue has been creeping up pretty rapidly over the past few years, and it's not too far away from 2009 levels anymore. We're at a point where no one can really deny that the economy is in a major recession or even a depression, and we can no longer deny that the housing market has been knocked off of its pedestal, and sellers now have to come to grips with reality if they want to get a home sold, including homebuilders. What this means for builders is the profit margins have taken a huge hit, and they're now deciding to slow down construction and wait for demand to recover. DR Horton, they only started building 14,500 new homes over the past three months, which is down 21% from just one year ago. That's a pretty big reduction in the amount of homes they're building, but nonetheless, they are still building homes. It's not like they have just ceased production. Brand new home sales make up roughly 20% of all homes sold on the US housing market, and so it has a major implication on where things are headed in the market, but also a major implication on what needs to be done to get a house sold. You see, these builders are offering people 4% interest rates. No one cares. They're offering people a 15% discount. When you combine all the incentives with the price cuts, it's not enough. What does that tell you about where things need to go for the average seller to sell a house right now? Well, sure, if you're sitting pretty in the Northeast or the Midwest in a very low inventory neighborhood, you can probably still do pretty well and ignore all this information, but that is not the majority of listings that are for sale right now. If you're in Georgia, Florida, Texas, South Carolina, Utah, Arizona, most of California, it is a completely different picture for you right now. Even the builders are kind of shocked right now by how much this problem with real estate is spreading to parts of the country that they thought would remain strong indefinitely, most notably Southern California. The amount of unsold homes in Southern California is roughly double what it was just one year ago based on the data from John Burns Research and Consulting. They consider a rate of two unsold units per development being a healthy number. In Southern California, it's five, so it is two and a half times higher than where it should be. Of course, new homes are becoming harder to sell in California because the inventory is not only higher than it's been, so people have more choices, but also the job market here is the worst in the country right now. California has the highest unemployment rate at over 5.5% of people being unemployed, and that's by the official numbers. What they actually are is probably in double-digit territory here. Obviously, the cost of living here is through the roof. You need to have extremely high income to be able to save enough money to even come up with a down payment and qualify to buy a house here. Unsold inventory of brand new houses is up a whopping 130% in Washington, D.C. compared to one year ago. This year, the government employees have been getting hit really hard with massive layoffs, been over 300,000 government employees lost jobs so far this year. Now, with the government shutdown making the problems even worse, Washington, D.C.'s market is an area in the Northeast that is crashing right now. Now, remember this next point I'm going to tell you because there's some new data out that tries to spin this in a way that isn't realistic. Buying activity by investors in the housing market is at the lowest level we've seen in 15 years. Remember what I just said, because in a little bit, we're going to talk about something that pushes back against that, but isn't really the full story. And that's because institutional buyers usually demand a discount of 20% or more over what a regular buyer is charged for a home. But builders are not ready to cut that deep yet. And right now, a large landlord like American Homes for Rent can build homes through its own construction company and make a better return than they would make if they bought inventory from another builder. Now, of course, home builders do struggle a little bit more than an existing neighborhood like this, mainly because they're in less desirable locations and the neighborhoods aren't really established. Sometimes there's not even any grass or trees or anything. It's kind of unappealing. And a lot of home builders typically target first-time home buyers, which is also at the lowest record since we started keeping track. And the average first-time home buyer right now is 40 years old. And I don't think anything can be done to bring the demand back to where these builders need it, other than slashing the prices even further, even bigger and deeper discounts to get people through the door. That's the only thing that matters. Nobody cares about your 4% interest rate. People care about how much are they paying because it's the only thing that cannot be changed once the sale of the property has gone through. You can change your insurance rates by changing insurance companies. You can change your interest rate by refinancing, but you can never change how much you paid for the property. You are stuck with that for a lifetime and your property tax bill will directly reflect that.