CEO says measures are inflating prices and hurting affordability
New home construction is one of the major pillars of most of the plans to improve housing affordability across the country.
On Monday, Bloomberg News reported that Lennar and Taylor Morrison Home were among a group working on a “Trump Homes” plan. This plan could involve building up to one million homes.
In areas where housing inventory continues to lag, a surge of new home construction could help ease home prices and provide more opportunities for first-time buyers.
However, one mortgage executive is concerned about the increasing use of builder incentives to try to get people into homes.
Darshit Chokshi (pictured top), president and CEO of Aequitas Mortgage, said these incentives are keeping home prices artificially high, thereby inflating existing home prices in the area.
“New build homes are still priced very high,” Chokshi told Mortgage Professional America. “Another thing, builders, as we all know, offer incentives to cover closing costs or buy down rates. I think that practice needs to be made illegal, because what they're doing is they're inflating the purchase price to give the same money back to buy down the rates.”
Reducing sales prices
Builder incentives remain a major factor for homebuilders in encouraging buyers to enter the market. According to the National Association of Home Builders (NAHB), in its latest Housing Market Index (HMI), 65% of builders used sales incentives in January, marking the 10th consecutive month with a reading above 60%.
Chokshi said those incentives are making it hard for people to afford high home prices. He hopes that builders will reconsider this practice and find other ways to help first-time homebuyers.
“Now your purchase price is high, your loan amount is high, and you're making it difficult for somebody to qualify for a loan,” he said. “So it's like, I'm putting my hand in my right pocket and taking the money out and giving it to my left hand to put it in the left pocket. It's my money. So some of those practices probably need revisiting. Maybe builders should do it just voluntarily and figure out, ‘How do we increase our own sales?’”
While incentives may be helping to keep sales prices higher, some builders are lowering prices as well. According to the NAHB, 40% of builders reported cutting prices in January. That was the third consecutive month that the number had been at or above 40%.
“Lennar was the first one who realized this last year,” Chokshi said. “They looked at their whole inventory. They had so much built-up inventory that they needed to sell. They got rid of almost all of their incentives. And they said, ‘We are not going to help you finance anything. We're going to drop the price by $20,000 to $40,000. Please buy the house.’ That's the key. They were, they were one of the smart ones.”
Challenges ahead
Potential help from Washington can’t come soon enough for a construction industry struggling with confidence. In the NAHB HMI report, the current sales conditions index fell one point in January to 41, with 50 being the neutral benchmark. The index charting prospective buyers' traffic fell three points to 23.
The future sales index fell three points to 49, the first time that number has been below average since September. Chokshi said that pessimism likely stems from the fact that wages haven’t kept up with home prices.
“One big factor that we all know is that incomes haven't kept up with housing prices,” he said. “We all know that it's not easy to raise somebody's income from $80,000 to $120,000 just because we want it to go up. How about the industry bring some of this cost down so we can meet at a level where more homebuyers qualify for purchases?”
Chokshi said he thinks another issue affecting affordability is that some builders are trying to do too much, and that specialization could help them save money and pass those savings on to the homebuyer.
“Imagine I did home building, title insurance, mortgage, everything,” he said. “Because my costs are so high, I have to bump up everything. That makes it unaffordable. But if I just focus on one line of business, which is my home building or my insurance, or my title or my mortgage, and stay out of everything else, I can keep my costs low and pass on the benefits to the home buyer.”
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