- Rising housing costs have resulted in many would-be buyers being priced out of homeownership.
- Homebuilder PulteGroup said 15% of its contracts fell through in the second quarter of this year.
- Other builders like D.R. Horton have also seen an uptick in home cancellations.
Inflation and interest rate hikes are driving up the cost of housing — and it's causing many would-be homebuyers to put their homeownership dreams on pause.
As buyers get cold feet, some of the nation's largest homebuilders are seeing their production volumes fall while their cancellation rates rise.
PulteGroup, a residential home construction company based in Atlanta, Georgia, is just one of many.
The homebuilder's net new orders were down 23% from the same time period in 2021, it reported in its second-quarter earnings call Tuesday. The cancellation rate of 15% was up from 7% just a year ago.
Although Pulte maintained a mostly positive outlook, there are signs that buyer behavior is impacting their operations. During Q2, the dollar value of its net new orders decreased by 8% from 2021 to $3.9 billion.
Ryan Marshall, the president and CEO of PulteGroup, says the quarter's downturn was caused by reduced consumer sentiment.
"The uptick that we have seen in cancellations has really been in the last 30 to 60 days, and the leading driver has been buyers' remorse," he said on the earnings call. "I think a big part of that comes from buyers that made a buying decision during the run up in interest rates, and as talk of recession increased, their remorse and fears have also increased with it."
Marshall says as soon as there is more stability and predictability in the markets, cancellation rates are likely to return to a "more normal range."
But it may take some time for stability to come back to the US housing market. The Federal Reserve's attempts to bring the economy into equilibrium have yet to be fruitful. Inflation and interest rates are still soaring, and it's made homeownership even more expensive. As buyers grapple with rising home prices and mortgage rates, it's led to an uptick in home cancellations — and Pulte is not the only major homebuilder feeling the strain.
D.R. Horton, the nation's largest builder by production volume, is facing a similar problem.
Although the company ended its third quarter with 56,400 homes in inventory – up 19% from 2021 — nearly a quarter of its contracts fell through in the three months ending in June, the company reported in its third-quarter earnings. The cancellation rate of 24% increased by 7 percentage points from just a year ago.
David Auld, the company's president and CEO, attributes the slowdown to "payment shock" among homebuyers.
"Toward the middle of June, we got a 100 basis point increase in long term rates over about a three or four day period," Auld said on the earnings call. "I think that impacted cancellations."
According to a survey conducted by John Burns Real Estate Consulting, the national cancellation rate among homebuilders reached 14.5% in June — the highest rate since April 2020, a time when the COVID pandemic quashed activity throughout the country.
This number could rise even higher as the Federal Reserve is positioned to raise interest rates again in 2022 – maybe even as soon as this week. For the nation's homebuilders that could mean things will get worse before they get better.