San Francisco, California – Homebuilders in California are facing challenges as they navigate a housing market affected by price declines and decreased sales of existing homes due to high mortgage rates. Despite median prices ticking up in January for new single-family houses, they were down by 2.6% from a year ago and 15.3% from October 2022’s peak. This drop in prices, down to $420,700, reflects the shifting landscape of the housing market.
While the median price may have decreased, mortgage-rate buydowns and incentives are not factored into these price declines. Homebuilders are utilizing mortgage-rate buydowns to maintain sales volume in a market where existing home sales have plunged due to high prices at mortgage rates above 7%. These strategies lower monthly payments for buyers but squeeze profit margins for homebuilders.
The competition between homebuilders and homeowners is becoming more aggressive, as the price points for new and resale single-family houses are converging. With mortgage-rate buydowns, the monthly payment on a new house can be lower than that of an equivalent resale house. Despite seasonal differences in pricing trends, the median price of new houses is now only 7.1% higher than existing houses, showing a narrower gap between the two markets.
The strategy of offering houses at lower price points and providing mortgage-rate buydowns has proven effective in maintaining sales of new houses, with 57,000 units sold in January. This contrasts sharply with the 20% decrease in sales of existing homes from January 2019. Homebuilders are adapting to market conditions by offering smaller homes and less expensive amenities to meet the demand for more affordable housing options.
Inventory for new houses remains high, with 456,000 houses available for sale in January, translating to an ample supply of 8.0 months. Despite the challenges posed by market conditions, homebuilders are actively engaging with buyers by adjusting their offerings to align with changing preferences and affordability concerns. The dynamics of the California housing market continue to evolve, putting pressure on homebuilders to innovate and adapt to meet the demands of prospective buyers.