In market hampered by interest rates, new homes are leading the way. Here’s why

With apologies to Charles Dickens, the housing market has become a tale of two sectors. The existing home market has been stymied — largely by mortgage rates that have climbed into the 8% range, but also by a rock-bottom lack of inventory.

The low interest rates people took advantage of during the pandemic have become a “disincentive” for those who would otherwise sell now, said Ali Wolf, chief economist at Zonda, an advisory firm. “They’re not eager to sell.”

At the same time, the new home market is thriving, mostly because builders can satisfy demand, even at higher loan costs. According to Wolf, whose firm specializes in new construction, builders are gobbling up a third of all sales. That’s double their traditional share of 10% to 15%.

“People are still out there shopping the market,” Wolf said during a recent webinar, “and builders are finding a way to satisfy them.”

While some builders are seeing a slowdown, most report their sales are still on track, she said. The majority of builders are not worried because they believe any falloff is seasonal. While some builders have raised their prices — some, just because they can; others, to slow things down a bit so their construction crews can keep pace — most are instead offering some kind of sales incentive. The most popular incentive? A mortgage rate buydown.

More than two-thirds of the builders queried by Zonda offer to buy down their buyer’s rate, either for the short term (one to three years) or permanently.

First-time buys

With many owners choosing to stay put rather than give up their relatively low-cost financing, first-time buyers are driving the market. According to Zillow, rookies account for half of all sales. That’s up from 45% last year and 37% in 2021.

A greater share of unencumbered first-timers is “filling the gap” left by

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