The Journal. - Homeowners Don’t Want to Sell. So Builders Are Cashing In.

Episode Date: August 1, 2023

It’s tough to find existing homes for sale these days. High mortgage rates are dissuading potential sellers. WSJ’s Nicole Friedman on a rare bright spot for house hunters: brand-new construction. Further Reading: ​​-Homeowners Don’t Want to Sell, So the Market for Brand-New Homes Is Booming  -The Home Buyer’s Quandary: Nobody’s Selling  Further Listening: -The Zombie Mortgages Stalking American Homeowners  Learn more about your ad choices. Visit megaphone.fm/adchoices

Clark Ivory runs Ivory Homes, one of the largest home building companies in Utah. Rumor has it you're a bit of a radio guy yourself. Is that right? Well, I do our commercials, you know. Hello, this is Clark Ivory with Ivory Homes. This year is going to be fantastic. Let me tell you about it. Hi there, this is Clark Ivory with Ivory Homes. This year is going to be fantastic. Let me tell you about it. Hi there. This is Clark Ivory with Ivory Homes. 2023 is going to be amazing, especially if you choose to move into a new ivory home. I love this.

Clark's industry has been on a bumpy ride in recent years. The housing market is sensitive to interest rate hikes, which make it harder for people to buy homes. Last year, mortgage rates hit a 20-year high. What's happening in the housing market right now is just frustrating. If you're a buyer, if you're thinking about selling, it's frustrating because of mortgage rates. Mortgage rates rising at the fastest pace since 1987. I believed 6% mortgage rates were accepted as the new normal.

I think now we're in an environment where 7% mortgage rates are now the new normal. If you were venting or talking to a friend in January of 23, what would you have said about your business's prospects for the year? It was going to be a tough year, very competitive year. You know, almost every builder that I talked to just said they were, you know, very cautious. They weren't going to take a lot of risks, but they were also nervous because they'd seen a really difficult period from summer till the end of the year. from summer till the end of the year. I think the other thing is, everyone had in the back of their mind how difficult it was in the last housing downturn.

And they were all hoping that it wouldn't be that bad. What happened instead was the latest turn in the wild ride that homebuilders have been on. Welcome to The Journal, our show about money, business, and power. I'm Jessica Mendoza. It's Tuesday, August 1st. Coming up on the show, how new home construction has gone from bust to boom. see you in Trilata. Oh, very flavorful. Yodeling with them. Ooh, must be mating season. And hiking with them. Is that a squirrel? Bear! Run! Collect more moments with more ways to earn. Air Mile. Our colleague Nicole Friedman covers the housing market. And she says the winding path home builders have been on started a couple decades ago. In the early 2000s, 2003, 4, 5, builders built a lot of homes.

They grew really quickly. They expanded. They bought a lot of homes. They grew really quickly. They expanded. They bought a lot of land. And then after the housing crash and during the foreclosure crisis, they were left with a lot of land, a lot of homes that they couldn't sell. That crisis really kind of decimated the home building industry. Many builders went out of business. industry, many builders went out of business. So the ones that survived were very, very cautious for a very long time. It meant fewer new homes were being built. Many builders and tradespeople

left the industry. For those that stayed on, things eventually stabilized a bit. But it wasn't going to last. Some extreme highs and lows were ahead. And it started in 2020 with, what else? The pandemic. So at the beginning of the pandemic, during the initial lockdowns, home sales fell really sharply. People backed out of their plans. They were scared to tour homes. And so home sales fell for the first few months. Nobody knew what was going to happen, and everyone pulled back. That's Clark Ivory again. Just months into the pandemic, whiplash. The housing market shifted, this time in his favor.

We realized, actually, that people were putting a premium on their housing, and everyone wanted to be in their own house or wanted more space. So we saw an incredible surge in demand. The rebound was massive, especially for companies that specialize in building new homes. In fact, for a lot of builders, 2021 was their best year ever. And so they were limiting sales where often builders would open sales at a certain community, maybe one day a month. And they would say, you know, everyone off our wait list, you know, the sales are going to open for five spots or 10 spots on Monday. And there would

be a lottery or there would be highest and best offer. People would compete to get into that next round. So builders were actively limiting sales because they just could not hire quickly enough. They could not buy land quickly enough. They could not build enough to keep up with the demand. Yeah, I feel like I remember all those stories from the buyer's perspective. It was like, I've been in a bidding war for 18 different houses, and I still haven't won any of them. But I hadn't thought about the builder side of it as much. So it's really interesting to think of them like scrambling to build all these new houses in all these different regions. It was chaos. Also, bidding wars is not typically a thing on the new home side, right?

That's an existing home thing. Making matters worse was a labor shortage, so that when demand surged after the lockdowns, home builders struggled to keep up, and supply chain issues didn't help. Suddenly, they just couldn't get the stuff. And so we had all sorts of stories from builders of just like they couldn't get windows, they couldn't get appliances,

they couldn't get garage doors, they couldn't get any of the items that they needed to build houses. And so they had to adapt on the fly. Often before they were even starting the home, even laying the foundation, they were ordering the windows. And they were actually closing homes, selling homes to customers and having them move in before they had the final appliances installed. What a wild time those years were. Yes. But the mad scramble to build didn't last.

That's because 2022 is when the Fed started aggressively raising interest rates. It's what caused mortgage rates to skyrocket and building activity to plunge. What really scared Clark Ivory was the speed at which rates climbed. We'd never seen that before. We anticipated sort of a gradual rise in rates. What we didn't anticipate was a doubling of rates in less than a year,

of seeing mortgage rates go from 3% to 7%. Clark started to pivot and became more conservative in his plans. It meant, you know, not buying any new land. We did lay off about 9% of our workforce. That's never fun. A lot of homebuilders were trying to sweeten the terms for buyers. More than 40% of builders provided incentives in July of last year,

according to industry data. Some publicly owned home building companies came out in the second half of 2022 saying they would cut prices if necessary to sell homes. We watched some other builders even in surrounding states that dramatically discounted housing. And we were very concerned about that because not only do we want to maintain our own margins, but we were concerned about people we were selling homes to. And we didn't want those who had already purchased to feel like, you know, people around them were buying houses for a whole lot less. But there was also another option besides just lowering prices. also another option besides just lowering prices. I'd love to hear about the incentives that you started offering customers. Could you talk about what those offers look like? So we and several

other builders looked at all kinds of ways to make buying a house more affordable. Now, interest rates are the most obvious way. If you can do something to impact the interest rate, you're going to have a great impact on affordability. Tackling interest rates. The way builders did that was through so-called mortgage rate buy-downs. Which means that, you know, we'll pay for you to have a lower mortgage rate, which then makes it way more affordable to the buyer than to go buy an existing home at a 7% rate. We focused on permanent interest rate buy-downs. On a $500,000 mortgage, that's $25,000 to $30,000. That's huge. That's a big concession. At the same time,

it had an impact of really making that home $80,000 more affordable. In other words, I would have had to discount the price on that home by $80,000 in order to have the same monthly payment that I was able to get for a home buyer with this 4.875 rate by buying it down and spending $25,000 or $30,000. Those discounts and buy-downs kept some builders afloat. But mortgage rates were still ticking above 7%, a two-decade high. And as 2022 was ending, many builders looked at the coming year with dread.

Like the expectations at the end of last year for what this year were going to look like were bad. And so that's part of why everybody was just hunkering down last year. All the business plans for 2023 were like, you know, absolute hunker down, don't spend money on, you know, anything we don't need. The next turn on this wild ride, that's after the break. under your supervision with live trip tracking and highly rated drivers. Add your team to your Uber account today. McCrispy fans, there's a new jaw-dropping McCrispy at McDonald's.

It's called the Firecracker McCrispy. It has the crispy, juicy, tender chicken you love, topped with crispy jalapenos and a super tasty sweet and spicy sauce. You'll wish this spectacle of flavor never ended. Try the new Firecracker McCrispy today at participating McDonald's restaurants. As this year was starting, builders were worried that the housing market would be just as bad as last year, if not worse. Instead, the market started to bounce back. Demand for new houses in particular started to rise again.

And a big reason? There's a shortage of existing homes. People who are locked in cheap mortgage rates don't want to give them up. And so what this means is that new home construction is the source of all the supply. And so for a home buyer, they're looking at existing home market where maybe normally there would be

a hundred homes in their price range and now there's 15. And they're looking at existing home market where maybe normally there would be 100 homes in their price range. And now there's 15 and they've looked at all 15. Right. And then they, you know, drive to the next neighborhood where there's a new home community for sale and there's more homes to choose from. And those homes are also being offered at a lower interest rate because of those mortgage rate buy-downs. Right. And so the new home market has really benefited from the shortage of existing homes for sale. The extent of that was really, really not foreseen.

Yeah, and this sounds like something that is a pretty unusual situation for the housing market in that new homes are getting way more attention and are like more available and affordable than existing ones. So what we're seeing is new home sales are rising and existing home sales are falling, basically. And if you look at inventory, new homes now make up about 30% of total homes for sale. And normally it's like 10 to 20. Wow. It's kind of unprecedented. It's pretty shocking. And so just the number of homes on the market, a bigger proportion of them are new homes. And that's really pushing people into the new home market. And so the builders who like had way cut back on construction and really pulled back on starts, pulled back on land purchases, they had, you know,

been in this very hunker down mode. Suddenly they're like, oh my God, we don't have enough homes started and we don't own enough land. Whiplash again. Whiplash again. It's been a huge rollercoaster. This new boom is giving builders a jolt of optimism for the rest of the year. But what they're framing up today looks a little different than before. Builders around the country are cutting costs and making smaller homes with lower price tags. Clark Ivory is one of them. This past June, Nicole met Clark in Utah. He gave her a tour of one of his company's new developments, Holbrook Farms, near Salt Lake City.

The reason I'm driving you through here, this has really been our bread and butter for the last couple of decades. This is the more traditional. This is our signature line. It's just a little bigger lot. It's a master-planned community, and so it's kind of very intentionally laid out. There's a big park.

You can see, you know, there's parts of it that feel, you know, very suburban, single-family homes with lawns out front and garages and cars. Clark says he's leaning into smaller houses. He says these two-story houses sell better. We've become much more focused on delivering more affordable product. That often means a little bit smaller homes on smaller lots. We've decided that people are really still very much concerned about style and design and the way these things live. Big windows are key, letting lots of light in, having the opportunity to still entertain,

even though it's a small home. There's a lot of things that we can still deliver now on a small lot in a small home, and that's something we haven't done as well in the past. And he's hoping that this new strategy will also help ease the current housing shortage. New construction is a bright spot, actually. And we're seeing that we're filling the need more than we ever have

for housing. And we're still not building enough. There's been a lot more household formations over the last 10 years than there have been housing units built. And so we're playing catch-up. Even in Utah, the economists sort of measure that we're about somewhere between 35,000 and 50,000 homes behind what has been created in terms of households. And so there's just still a shortage. Clark knows that the cyclical nature of the housing market means these good times might not last.

For now, he's looking forward to telling anyone who will listen about the new housing boom. I can tell you what I would say on the radio if they just put a mic in front of my face right now. And that would be, 2023 has turned out to be a lot more amazing than we thought. We're buying down interest rates into the low fives. We're helping people qualify. And guess what? Builders are offering inventory with lots of great selection. How does that sound?

I can't believe you just did that on the fly. That was amazing. It's good. That was so great. That was so great. That was so great. That's all for today, Tuesday, August 1st. The Journal is a co-production of Gimlet and The Wall Street Journal. If you like our show, follow us on Spotify or wherever you get your podcasts. We're out every weekday afternoon.

Thanks for listening. See you tomorrow.