Here’s a First: Builders are Undercutting Existing Homeowners' For-Sale Prices
New homes are somehow being priced below older ones.
By Paul Rubillo ·
This chart from re:venture looks like a housing market anomaly. It's actually a mortgage rate story that connects directly to everything we've been talking about on this site for months.
New homes are now selling for about $35,000 less than existing homes, a complete flip from the normal spread where new construction has always carried a premium.
The lock-in effect is a fixed income phenomenon
As we’ve heard this anecdote from time to time, the refusal by existing homeowners to sell because many are sitting on mortgages financed when the 10-year Treasury was near zero and 30-year rates were in the 3% range, is coming home to roost in the form of steeper selling competition from homebuilders. Selling means giving up that rate and refinancing into whatever the market offers today, which we've discussed sits close to 7%.
Builders don't have a rate problem, so they're eating the spread instead
A builder doesn't have an existing 3% mortgage to protect. A builder has unsold inventory sitting on a balance sheet costing them money every month it doesn't sell. Builders are buying down mortgage rates for buyers directly, often through their own in-house mortgage arms, and eating that cost by cutting the sale price instead of holding firm on it.
New homes are not cheaper to build. builders are effectively absorbing the spread between what the bond market is charging and what a buyer can actually stomach paying, and they're doing it because they have to move inventory while existing owners can simply wait the cycle out.
This is a private-sector version of what the Fed used to do
Builder-funded rate buydowns are the same idea behind the Fed buying mortgage-backed securities during QE: someone stepping in to compress the effective mortgage rate below what the raw math of Treasury yields plus spread would otherwise produce. The difference is the Fed did it with its balance sheet as part of its monetary policy. Builders are doing it with their margins and making it part of a sales incentive promotion.
Why this matters for the inflation conversation too
We've spent real time on this site talking about how sticky inflation shows up in unexpected places, McDonald's beef costs, national debt servicing, now here it is again in housing. Existing home turnover sitting near multi-decade lows because of the lock-in effect directly affects the shelter component of CPI, which is one of the stickiest, most stubborn pieces of the entire inflation basket. A frozen existing home market means fewer transactions resetting to current market rents and prices. With this scenario, shelter inflation stays elevated and stays sticky longer than it otherwise would.
The bottom line
We have a courtside seat (still in basketball mode since my Knicks won the NBA title) to how the bond market is currently distorting two sides of the same market in opposite directions: locking existing supply in place while forcing new supply to discount its way to a sale.
As long as the spread between legacy mortgage rates and today's 10-year-driven rates stays this wide, expect this inversion to stay exactly as "historic" as the chart says it is. Lots to think about for our audience and anyone deciding whether they should be starting to downsize and sell and whether new home sales incentives means buyers need to be thinking of new home construction (where quality isn’t always the way they used to build things).