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Homebuilders are boosting incentives as they suddenly struggle to sell homes

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Sales of newly built homes fell more than 8% in June from the prior month and were 17% lower than June of 2021, according to a report Tuesday from the U.S. Census.

After two years of not being able to build homes fast enough to keep up with demand, the nation's homebuilders are now experiencing a slowdown in sales and an increase in supply.

Sales of newly built homes fell more than 8% in June from the prior month and were 17% lower than June of 2021, according to a report Tuesday from the U.S. Census. Inventory also rose to a 9.3-month supply, up from 5.6 months at the end of last year.

Chief executives of major builders are saying they have to respond more quickly to the sudden turnaround in the market, in part by boosting incentives.

Pulte Group, one of the nation's largest homebuilders, reported Tuesday that net new orders for its homes in the second quarter were lower by 23% from last year. The company's cancelation rate was 15%, compared with 7% in the prior year period.

"We have to work harder to sell homes. We have to be more nimble," Pulte CEO Ryan Marshall said on a conference call with investors. "Home price appreciation has slowed, stopped, or, through the use of incentives, is taking a couple of steps back. Through much of the second quarter, incentives were mostly tied to the mortgage, but this is now expanding to include discounts on options and lot premiums."

The median price of a newly built home sold in June was $402,400, still up 7.4% from a year ago. But the market had been experiencing double-digit price increases. Builders are getting help from lower commodity prices now, especially lumber, and land prices are starting to adjust lower as well.

Buyers are still seeing sticker shock, though, due to the sharp rise in mortgage rates and inflation in the overall economy. The average rate on the 30-year fixed mortgage began this year around 3% and then began rising steadily. It jumped over 6% briefly in June, before settling back in the high 5% range.

"The consumer, really, it was mid-June that we saw this kind of pullback, that pause. I kidded our sales people the other week that they'd gone from order takers to financial therapist," said Doug Bauer, CEO of Tri Pointe Homes on CNBC's "Squawk on the Street."

The builder is also increasing buyer incentives.

"I think over the next quarter or two there will be some price discovery as we match up mortgage payments with pricing," Bauer added.

Prices for existing homes are also starting to come back to earth. While still in the double digits, price gains decelerated in May for the second month in a row, according to the S&P Case-Shiller national home price index. Prices are stubbornly high in the existing home market because supply is still quite low. The builders had been helping, accelerating construction, but that has suddenly changed.

"This may just be the beginning of a difficult stretch for the homebuilding industry," said Nicole Bachaud, an economist with Zillow. "Decelerations in housing permits and starts activity will put a cap on sales in the near term and suggests that builders are bracing for rougher road ahead, even as the housing market remains hungry for more inventory with long run demand staying put."

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