Rising Rates Threaten Home Builder Sales

29 June 2013

Newly built homes are good for replenishing the tight supply plaguing markets across the country. The recent mortgage rate increase, however, may dampen the sales of these homes, which were mainly built upon signed contracts—homes that are yet to be constructed.

The problem: The contracts were signed before the mortgage rates jumped to their highest last week.

Since these deals are not set in stone, cancellations are expected thus threatening the soon-to-be replenished inventories.

Only 31 percent of the total sales contracts signed in May were for completed residences. It is likely that buyers already locked in their loans before rates shot up. 24 percent of those contracts were still under construction.

The danger is on the 36 percent of those signed contracts which were for homes not yet under construction. On the off chance that buyers have already secured their mortgages, the builders can definitely continue with their job. However, for those who were caught with the spiking rates, cancellations are a definite possibility.

The problem also lies with the time needed to close a deal. Loan locks could take months and buyers could end up paying extra dollars which could offset the original price of the property and eventually cancel the deal. Labor constraints also add to the problem despite many builders’ being able to complete a construction in less than four months.

The one thing still happening right now is the tight supply. Builders are experiencing hurdles in supply due to the sudden increase in demand. The need for new homes has surged during the past months due to the declining inventory and the sluggish foreclosure process.