The Federal Reserve Open Market Committee (FOMC) closed Q3 2024 by announcing the decision to cut interest rates by 50 basis points, lowering the federal funds rate to a target range of 4.75% to 5%. This long-awaited policy move marks the first reduction in interest rates since the early stages of the COVID-19 pandemic.
With these cuts comes the hope of alleviating affordability concerns within the U.S. housing market and stimulating inventory growth. But how should home builders respond to these lowered rates as many begin planning for 2025?
Home Builder Strategies in Response to Rate Cuts
Eliminating buyer incentives may seem like the natural first response for large builders; however, the effects of the rate cuts will gradually penetrate the business cycle and consumer decisions, with significant impacts felt closer to Spring 2025. Simply put, patience is key.
As home builders see affordability increase and buyer demand improve over time, there will be opportunities to decrease incentives slowly based on market conditions and sales team performance. Builders should continue to monitor particular buyer groups and communities, offering tailored incentives when applicable to maintain a steady flow of new home sales.
These interest rate cuts arrived at an opportune time for new home sales professionals heading into the fall selling season. As such, it is imperative that sales teams take advantage of this window of opportunity when affordability is on the rise, and buyers are looking to make a home purchase before the holidays. Agents must be proactive in securing buyers and ensuring that sales happen before the downtick of the winter months.
Impacts on Land Purchasing
For builders who have been wavering on a prospective community purchase, phase extension, or land deal, consider these cuts as a sign to move forward. As land prices continue to skyrocket, the relief many seek will come from their ability to borrow, which will be favorably impacted by the rate decreases. Remember that this is a highly competitive space with countless builders in the same boat, potentially vying for the same deals. The time to execute is now.
Future Rate Changes, Economic Factors, and Governmental Policies
In the wake of the pandemic, the FOMC opted for interest rate hikes to keep inflation at bay. Fast-forward to Q3 2024, and a more prominent concern emerged: the growing instability within the labor market. This instability catalyzed the FOMC to shift its monetary policy and decrease interest rates by half a point as a proactive tactic to abate any potential labor crises. Any future rate changes are expected to be smaller and more gradual based on the labor market’s stability and whether or not inflation begins to rise.
Ahead of the 2024 Presidential election, the affordable housing crisis is top-of-mind for many voters and the two presidential candidates. While both have differing plans to combat the volatile housing market, Vice President Harris and former President Trump see the U.S. housing shortage and affordability crisis as priority number one, and the future president’s administration will indeed reflect that.
Buyer Behavior and Market Dynamics
In the coming weeks and months, community managers and sales leaders are sure to encounter home buyers who are set on waiting for rates to decrease even further. Sales professionals should discuss the current market dynamics so potential buyers understand how the ongoing supply and demand imbalance increases home prices. Until there is alleviation on the supply side, housing prices will only increase. Buyers must be aware that any potential gains they could capture with the decreased interest rates could easily be eroded by rising home prices the longer they wait.
If there is a lot or an inventory home a buyer is interested in, agents should reassure them that the best time to purchase is now. Should interest rates continue to decrease, they can always refinance the home in the future.
Existing Home Market and Supply Issues
Many existing home owners have little motivation to move out of their current home and forfeit a mortgage rate of sub 6% or lower. Over the summer, sales of existing homes fell 2% year over year. This so-called “lock-in effect” is one of the major factors driving the housing supply down even further. While interest rates are trending downward, they haven’t yet hit the threshold needed to unfreeze the existing home market to help alleviate the supply and demand pressures pushing prices forward.
For this reason, there is a substantial need for an influx of new construction to help relieve the supply and demand pressures within the U.S. housing market. The bulk of the U.S. housing supply is expected to come from new homes. Builders and their sales teams play an integral role in tempering the housing supply crisis — every home sold helps.
Spec Home Building Strategies
What’s the solution for maintaining the required influx of new construction? Spec homes. Appropriately built, appropriately priced spec homes will sell, especially those on the affordable end of the spectrum in their respective markets. Think: If you build it, they will come.
As borrowing costs decrease, builders should immediately consider increasing their spec home inventory, completing them before the strong 2025 spring selling season.
Looking Ahead
Home builders should see the recent interest cuts as a pivotal opportunity to recalibrate their year-end tactics and position themselves for success in 2025. The housing market will only continue to evolve in the years to come, but by leveraging these strategies, builders and their sales teams can not only navigate the current housing market landscape but also play a significant role in shaping its future.
