Surging Demand for Home Builders Amid Homeowners' Reluctance to Sell

LEHI, Utah—In the wake of a surge in mortgage rates last year, Ivory Homes, a prominent builder in Utah, experienced a sudden drop in buyer demand for their hundreds of homes under construction. As a result, Clark Ivory, the CEO, made tough decisions, including a 9% staff layoff, and significantly reduced construction by nearly 80% compared to its 2022 peak.

However, to everyone’s surprise, new home sales began to pick up. By May, despite mortgage rates remaining relatively stable, sales for all home builders reached their highest level since early 2022.

Yet, millions of American homeowners are reluctant to sell due to low mortgage rates, leading to a scarcity of existing homes on the market. New construction has become the dominant option for prospective buyers in Utah and many other markets. In May, newly built homes accounted for nearly one-third of single-family homes for sale nationwide, significantly deviating from the historical norm of 10% to 20%. While existing-home sales saw a 20% year-over-year decline in May, new single-family home sales rose 20% on an annual basis.

This unique divergence exemplifies the unprecedented behavior of the current housing market. The resurgence in home-building and financial incentives offered by builders provide some relief to prospective buyers, but the shortage of existing homes continues to drive bidding wars in many regions. Nationally, home prices have only slightly declined from their record highs in spring 2022, and interest rates have risen to their highest levels this year.

Despite challenges, the home-building industry, known for its sensitivity to interest rate changes, has shown signs of revival. Builder confidence, after declining each month in 2022, has risen for seven consecutive months, reaching its highest level since June 2022, as reported by the National Association of Home Builders.

Publicly traded home builders have outperformed expectations this year, with the S&P Homebuilders Select Industry stock index recording a 39.8% gain, surpassing the S&P 500’s 18.6% increase. Notably, share prices for major home builders D.R. Horton, Lennar, and PulteGroup have performed even better.

The pandemic-induced housing boom in 2020 and 2021 saw buyers seeking larger spaces and proximity to family, facilitated by ultralow interest rates making home financing affordable.

The pandemic triggered a remarkable surge in home-building activity, particularly in states like Utah within the Mountain West region. People seeking a more affordable cost of living and an outdoor-oriented lifestyle opted to leave the expensive West Coast cities, causing home prices in the Salt Lake City area to skyrocket. According to Freddie Mac’s home-price index, there was a staggering 53% increase in prices from January 2020 to May 2022 on a seasonally adjusted basis.

For decades, Ivory Homes, a family-owned company founded by Ellis Ivory, has been a prominent home builder in Utah. Taking the reins as CEO in 2000, Clark Ivory, now 58, continued the legacy of his father.

Around the peak of the previous boom in 2006, Ivory Homes faced concerns regarding speculative investing. To mitigate risks, they decided to purchase less land and prioritize debt repayment. Furthermore, they required buyers to sign agreements confirming their intention to use the purchased properties as primary or secondary residences, prohibiting resale for at least a year and avoiding dealings with flippers.

While the period between mid-2006 and early 2012 saw a substantial 27% decline in U.S. home prices, causing global economic repercussions, Ivory Homes remained profitable from 2008 to 2012.

Interestingly, the recent housing boom driven by the pandemic involved less speculation. Improved lending standards and investor interest in buying homes for rental purposes contributed to this shift. However, builders faced different challenges this time, including supply-chain disruptions and labor shortages that delayed construction timelines by weeks or even months. Nevertheless, affordability remained a significant concern for Ivory Homes’ CEO, Clark Ivory.

In the spring of 2022, the rapid increase in mortgage rates caused a sudden slowdown in home purchases. Prices had surged so high in Utah and across the U.S. that many potential buyers were priced out of the market. Ryan Smith, the president of home building for Oakwood Homes, a Denver-based unit of Berkshire Hathaway, which operates in Colorado, Utah, and Arizona, described how the market drastically changed, and they had to work hard to prevent buyers from canceling their purchases after the sudden rate hike in May the previous year.

During the first quarter of the previous year, Ivory Homes had an impressive 1,089 homes under construction, out of which 513 remained unsold. In hindsight, Ivory acknowledged a significant mistake in trying to keep up with the soaring demand during the pandemic. Reflecting on his management decisions, he admitted that he should have recognized the overwhelming demand and its limitations, instead of pushing the company beyond its capacity.

As the second half of 2022 approached, builders across the board had to adjust their strategies to entice buyers for their unsold properties or persuade those already under contract not to back out. Price cuts became a common approach to attract buyers and stimulate sales.

However, demand rebounded strongly in the first quarter of the current year, surprising the market. According to a survey by John Burns Research & Consulting, builders were now forecasting a 7% increase in sales for 2023 by April, reversing their previous forecast of a 9% drop made in November.

The master-planned community of Daybreak, located about a 30-minute drive from Salt Lake City, experienced a similar surge in demand. Originally planning to sell 100 to 125 lots to home builders, including Ivory Homes, they had to adjust their expectations as the number increased to 160 lots. The scarcity of inventory in the existing market pushed buyers towards newly built homes.

In response to the ever-changing demand and preferences of buyers, Ivory Homes adapted its building plans accordingly. A new focus emerged on a master-planned community called Holbrook Farms in Lehi, situated approximately 30 miles south of Salt Lake City, an area flourishing with numerous tech businesses – a major market for Ivory Homes and other builders.

Last fall, Ivory Homes initially developed three-story homes with three or four bedrooms, targeting first-time buyers with open kitchens and a price range of up to $625,000, known as E-Villas. However, as demand slowed towards the end of the year, the company recognized the need to cater to a lower price point. Consequently, they redesigned the E-Villas, offering a more affordable two-story version with three bedrooms, priced below $450,000. Surprisingly, the two-story homes began outselling their three-story counterparts.

Not only Ivory Homes but builders nationwide shifted their focus to cost-cutting measures and building smaller homes with more affordable price tags. Nationally, the percentage of new homes sold for under $300,000 in May rose to 17%, reaching its highest level since December 2021.

To sweeten the deal for buyers, home builders started offering more attractive terms and incentives. According to a NAHB survey, about 52% of builders provided incentives in July, up from 43% in the same month of the previous year. To make monthly payments more manageable, many builders opted to lower buyers’ mortgage rates by a percentage point or even more.

Some builders offered temporary buydowns that reduced mortgage rates only for the initial years of the loan. However, several, including Ivory Homes, took a different approach, offering lower mortgage rates for the entire duration of the loan. Buyers would need to qualify for the highest mortgage rate the loan would ever reach to benefit from these extended buydowns.

Both buyers and sellers found mutual benefits in these arrangements. Builders preferred paying for lower mortgage rates instead of cutting prices since significant price reductions could affect the value of other homes in the neighborhood. On the other hand, buyers welcomed the lower mortgage rates, as they could lead to more substantial monthly savings compared to price cuts.

The rapid surge in Salt Lake City’s housing prices that characterized 2021 and early 2022 has now subsided. A recent survey by John Burns Research & Consulting revealed that average new-home prices in the metro area fell by 11% in June compared to the previous year, considering the value of incentives offered.

Holbrook Farms has become an attractive option for first-time home buyers, taking into account a mortgage rate of nearly 7%. However, Ivory Homes, the builder, provides a rate buydown, boosting the purchasing power of buyers by a substantial $100,000, as explained by John Savage, an Ivory Homes sales consultant.

Katherine Luke and Muhammad Salman had been searching for their first home in the Salt Lake City area for over two years. Disappointed by the limited choices and the need for costly renovations among existing homes, they turned their attention to new homes. The new-home market offered more options within their budget, and they eventually purchased a new four-bedroom house from Ivory Homes for about $600,000 in early July. The couple opted for a temporary buydown to reduce their mortgage rate during the first two years of the loan, with plans to refinance to a lower rate when possible.

Although buyers are sensitive to fluctuations in mortgage rates, the current average rate of around 7% remains tolerable. Builders are mindful that if the average rate were to exceed this threshold, it could slow down demand. The average rate for a 30-year fixed mortgage reached 6.96% in the week ending July 13, the highest since November, according to Freddie Mac. Additionally, factors such as a potential recession, higher unemployment rates, or uncertainty about the presidential election might also deter buyers.

Some regional and local banks have been tightening credit for small businesses, raising concerns about builders’ ability to secure loans for new projects. Though builders’ costs have decreased somewhat due to a decline in lumber prices, they remain higher than pre-pandemic levels. Moreover, the impending resumption of federal student-loan payments in the fall may make it challenging for first-time home buyers to save for down payments.

However, many buyers who postponed their home-buying plans in 2022 have become comfortable with the current mortgage rates. Real estate agents and builders report that individuals are eager to settle down, such as newlyweds or recent college graduates who have grown tired of waiting.

Despite the challenges, the recent robust home sales and high margins during the housing boom have put builders in a favorable position. They can still afford to offer rate buydowns as incentives to attract buyers. Ivory Homes, for example, is optimistic after a successful first half of the year and views the market with confidence, stating that there is no need to fear the current situation.