Fed's recent rate cuts could influence trends in US homebuilding sector

During the COVID-19 pandemic, rock-bottom interest rates sparked a homebuying frenzy as the national housing supply struggled to keep pace. The result was soaring prices for existing homes coupled with record-low housing stock levels.

This shortage created an opening for new-construction homes in the housing market to meet demand and offer modern amenities, energy efficiency, and customizable features.

“There is a clear and present need for newly built homes to meet the demand for housing, and this construction is an important contributor to overall economic activity,” says Joel Berner, senior economist at Realtor.com®, in the September New Construction Report.

With that in mind, Realtor.com is presenting its Days of Deals, a limited-time browsing experience from Sept. 18 to Oct. 6, designed to help anyone interested in buying a home find builder promotions and incentives—all in one place.

In July, some buyers were able to save up to $50,000 when buying new homes, thanks to incentives such as appliance packages and $10,000 toward closing costs.

Certain regions of the U.S. are hot spots for new construction, particularly the South and West. In fact, in five states within these regions—South Carolina, North Carolina, Idaho, Arizona, and Florida—new-construction homes are priced lower per square foot than existing homes, making them particularly attractive to budget-conscious buyers.

The number of homes for sale has been gradually ticking up; but as of December 2023, the U.S. still faces a shortfall of 7 million homes. Levels of listings remain low because many homeowners simply aren’t selling (and then buying again) due to years of stubbornly high mortgage rates.

Recently, however, mortgage rates have dipped to their lowest point in over a year—and there’s potential for further declines.

But here’s the catch: Even if rates drop from the current 6%–7% range, many potential sellers remain anchored to the ultralow rates they locked in a few years ago, making them reluctant to list their homes. This ongoing gap means new construction remains critical in alleviating the housing crunch.

The Federal Reserve has issued its first interest rate cut in four years, kicking off an easing cycle that will make new mortgages more affordable.

Fed policymakers announced the half-point rate cut on Wednesday, bringing the central bank’s effective benchmark rate to about 4.8%, down from a two-decade high of about 5.3%. It marked the first rate cut since March 2020 and follows two years of elevated interest rates in the central bank’s fight against inflation.

The half-point cut is larger than the quarter-point markets predicted as little as a week ago and signals that the Fed believes inflation has been vanquished and is now focused on preventing a recession and major job losses.

“Rate cuts will have a mixed impact on new construction,” says Berner. “On one hand, buyers’ budgets will expand, and new builds that were previously unaffordable to the marginal buyer will get more attention than they did before. On the other hand, many homeowners with locked-in low rates have been waiting for a drop in rates to list their homes so we’re likely to see a flood of existing homes hit the market creating competition for new construction.”

Once mortgage rates soften and homes hit the market there will still be high home prices to consider.

“In August,the median listing price for a newly built home in United States was $450000 down slightly from July but down significantly from $470000 peak July 2022” says Berner “Existing homes on other hand peaked earlier this summer have been trending upward over past two years they had historically”

The median listing price for existing homes was $415000 June fell $400000 August

Builders are strategically addressing affordability gap resale market which has played key role stabilizing listing prices this year

One factor driving downward trend new-home prices builders focusing smaller more budget-friendly designs

In 2022 median size new build was 2128 square feet but by 2024 it had shrunk 1965 square feet

Meanwhile existing homes saw slight increase size with median rising from1770 square feet1784 during same period

Another reason behind drop new-home prices strategic use builder incentives

“Builders great position adapt market work consumers get cost relief various ways including cash-back options help down payments rate reductions through preferred lenders” says Cliff Johnson vice president New Homes Rentals Realtor.com “Additionally long-term value new construction amplified buyer savings due lower maintenance costs lower utility costs these factors combined make great time buy”

The South or West regions have fastest-growing overall housing-stock levels new construction 

While existing-home inventory continually trailed prepandemic period,new-home listings there steadily increasing since2022 according Berner

“In January2024 there were20.3%more builds market January2020” he says “In August2024 level reached30.3% On other hand there were25.2%fewer existing-home listings January2024 than January2020”

This surge new construction created wealth opportunities homebuyers especially states where builds not only plentiful also affordable than existing homes

For prospective buyers interested purchasing newly built home10states above offer more newly built options more affordable growing fastest If you’re interested checking opportunities promotions your area check out Realtor.com Days Deals builder promotions