Better Luck Next Year? Builders Weigh In

As we draw closer to 2027, builders’ optimism for the coming year among small to mid-size builders depends on where they do business. One bright spot — they agree that we are not headed for a repeat of 2008.

I was fortunate to be invited to sit in on a nationwide call among builders and construction professionals – much like I reported on in July – to hear how the housing industry was faring from their point of view. [Editor’s Note: Due to a confidentiality agreement, I cannot reveal the names or companies on the call.]

Before we delve into the heart of the discussion, an interesting observation was made by a general contractor in Virginia who noted that builders are starting to use AI before submitting plans for permitting. Instead of just uploading a scanned copy of plans to a permit office, some builders are using an AI tool to do a cross-check that saves time and cost by preliminarily avoiding reasons a permit may be rejected or need correction and resubmittal. For example, AI can compare drawings against the building and zoning rules for that specific municipality and flag potential problems such as a too-narrow egress path or a setback violation before a reviewer sees them. AI can also look for missing signatures and required details as well as conflicts between sheets, such as a window that appears on the floor plan but not the elevation. In this particular conversation, the context was that builders were using AI to speed the permitting process, which can be notoriously slow to complete. This discussion made me wonder if lighting showrooms are using AI in a similar fashion to check their lighting plans.

The meeting started with the universal acknowledgement that the pace of home building sales has slowed in every region of the country. An executive with a Colorado-based construction management firm observed that buy- downs are no longer “moving the needle as far as getting purchasing going again” for property developers.

Other builders and construction professionals on the call agreed. In states that have been particularly sluggish, such as Colorado, one professional said, “People are not buying right now. I don’t know that anyone has the solution – via incentives or price reductions – to get it going again.  The general sentiment is that it’s just not going to happen.”

With many mortgage rates now at over 7%, buydowns alone aren’t enough to convince people to buy.  He added, “If you go on Zillow and look at all the new builders, they’re offering $30,000 less than it was last month. It’s not just my market. It feels like every time I open a magazine from different parts of the country, everyone’s feeling the same pain. Sales are down and it’s hard to get buyers to the table.”

Noted a founder of a Chicago-based real estate financing firm that specializes in providing capital for homebuilders and developers, “Where I’m seeing activity is in land development and selling finished lots to the public builders. That business is going gangbusters because even though the public builders are cutting their margins and providing huge incentives, they still need lots because they still have to feed their operations. Land development is still moving ahead.”

That executive also noticed this shift: “I’m seeing Build to Rent (BTR) being fairly solid. I’m seeing builders of spec homes not being able to sell them and asking me to help with rental loans. I know of one builder who built 20 spec homes and he can’t sell any of them.  He’s tried to cut prices – and that didn’t work – so he wants to rent them out. This could be something that is happening more and more.”

So who is doing well?

By all accounts, the Southeast has remained strong, especially among public builders. The Midwest and Texas were also reported as remaining steady.

One builder in the Southeast stated that, “This has been a pretty normal market for us with average sales, average absorption, average closings. We have a lever where we can offer some financing options and some other incentives that perhaps an existing home seller can’t — but the reality is that it comes down to home price. There are more homes on the market. It’s supply and demand. We all just have to decide what is it worth to us as new home sellers to incentivize the buyers to buy our homes. The latest reports are that sales prices have reduced between 3 to 5% net [in the hope that] it is going to increase sales.”  

And while the Southeast is considered to be a market that will continue to grow, those sales might not be coming soon. “We know the demand will be there; we just don’t know when,” a builder in that region said. “And so we’re building the homes for what we expect demand to be.  Today, we’re building more homes than we expect to be bought, but history tells us that those homes will eventually be bought.”

Headwinds from the rental market

According to some builders on the call, renting while waiting for interest rates to come down is one option that potential home buyers are taking — but there is also a generational shift in thinking.

“Rising home prices have made rents seem more affordable,” one builder said, adding, “It’s very hard for us to compete with rents — and that will probably be the case for the next two or three years. There are enough rental properties available to make renting reasonable for the homebuyers we would have in a normal market. As homebuilders, we might have to grab more renters than we normally would to make up the difference.”

Another builder mentioned that younger people don’t have the same motivation to become homeowners as previous generations did.

“In the past, people wanted to have the white picket fence and a home, but today’s youth population – which is the largest population right now – aren’t nearly committed to having that piece of the pie [or the American dream]. They’re more committed to, “I want my little piece of the pie, but I’m not committed to owning anything. I just want to have my own place where I’m at. I can’t blame them for that thinking because it was much easier to have our piece of pie when I was their age versus their current age. The affordability issue is a big thing. It’s huge.”

Today’s younger demographic, some of these builders said, is more comfortable with the idea of renting, preferring the ease of being able to leave quickly and move somewhere else without having contingencies like having to sell an existing home first or having to deal with home repairs and maintenance.

Where things stand now

The discussion turned to the National Association of Home Builders’ September builder confidence report, which noted a drop of three points to 32, according to the NAHB/Wells Fargo Housing Market Index. “Buyer traffic has weakened across much of the country, largely because of rising mortgage rates,” said NAHB Chairman Bill Owens in the report.

Specifically, the conversation on the call involved what was causing hesitation in home buying that has led to reduced sales. Were consumers needing more time to consider a home purchase than in the past? Was price the only stumbling block? Or were there other factors such as job security, inflation and global uncertainty making an impact?

Unanimously, builders said the answer was price. Noted one, “Buyers’ number one concern is ‘What are my monthly payments?’ and ‘What can I expect in the future?’ We tell them, here’s what the monthly payment will be, but we can’t control what the insurance and the taxes and all the other stuff will be. We can only control what the payment will be: It’s going to be this price at this interest rate.”

Obviously, those changes in insurance and taxes aren’t unilateral; they vary by region and by market. A Southeast builder remarked, “For example, in one Florida market we’re in, all of a sudden insurance went up by 200%. We had no idea that was going to happen. On the other hand, in North Carolina, everything has remained flat. The buyer is fearful about what to expect going forward. We can say you can expect your insurance to be [around this number] and the mortgage rate to be [another number], but I don’t know what your taxes are going to be. That depends on the local government. They may raise taxes by 20% next year. I have no idea.” And so it is that volatility of the unknown costs that can crop up after a home purchase that many builders believe are adding to the slowdown in home buying.  

This does not mean, of course, that renting is always the better option. As one builder noted, rents can go higher than expected simply because property owners are able to pass costs such as those unexpected increases in insurance and taxes onto the renter. He explained, “If a renter doesn’t want to pay that [new] amount, they have to leave. Whereas if they own a home, they have options.”

Home builders have tools to make their new homes affordable for the buyer versus the options offered when buying an existing home. “We can structure a deal that works that no existing homeowner can ever possibly structure their deal to work that way,” one builder explained. “We have a great advantage and we should use that in every possible case. Not only because we’re better than the existing home – because we’re offering a brand new home that has a one-year builder warranty and is energy efficient and has all the latest things that go with it – it’s just that we have the ability to better serve the buyer to meet their need and make their life better.”

Expectations for 2027

Builders on the call were unanimous in predicting that the upcoming year is not going to be a wonderful one from a profit perspective. One prediction was that the housing market will probably be down 20% overall on a national level.

However, Southeast builders were the most optimistic due to ongoing job growth from manufacturing jobs and the development of data centers. “We can’t help but grow,” said one. “Markets like Charlotte, N.C., Huntsville, Ala., and Nashville are areas where you have base growth in manufacturing and industrial jobs. There will be a lot of people coming there because there are jobs to fill.”

According to several builders, Florida was not expected to have a lot of growth while Midwest cities such as Dayton and Columbus in Ohio and Indianapolis in Indiana are predicted to have modest growth due to a more affordable cost of living plus new job creation opportunities.  

A North Carolina construction professional said, “Today, we have a higher supply than demand. But in the future, going by everything that I see, we are not building near enough homes to meet the supply that’s going to be required in the future. For me and my companies, you can’t build enough homes to meet the supply.  Anyone who is expecting a 2008 or 2009 cataclysmic decline in price is [mistaken]. That’s not going to happen. There will be a reasonable decrease in prices, a reasonable decrease in interest rates, but there will be an equalization of supply and demand in housing — because there always has been. I don’t see an enormous decline in interest rate either. There won’t be any enormous decline in anything because we’re not in 2008. It’s a totally different market now.  We are in a very regulated, very reasonable, very decent market that yes, is slightly overpriced. We have a slightly high interest rate market, but we don’t have anything near what we had in the downturn of 2008. So if you’re waiting for that to happen again, you’re going to be waiting a long time.”

The challenge for lighting showrooms

The upcoming year’s greatest challenge isn’t just the reduction of homes being built; it may also involve the way that builders need to make their margins. Maybe that means swapping out recessed lights for disc lights and spec’ing less decorative fixtures even in prime areas  where statement lighting used to go, such as foyers, great rooms, and over kitchen islands.  

For many decades, builder business was the bread-and-butter income for most lighting showrooms. It was consistent and steady year-round. Custom and luxury home builders are feeling the financial pinch less than those in the starter home and tract home segments — but all builders at every level are feeling the effects of a buying slowdown.

As builders are taking longer to complete homes, lighting showrooms are in a tough spot of trying to be accommodating with an increasing number of builder requests – ranging from more flexible terms in warehousing and payment terms – without damaging a long-standing relationship. Lighting showrooms are also potentially losing sales when builders decide to source their lighting online in the interest of “saving money.”

How is your showroom handling the slowdown in builder business? Email me and let me know at linda@homenewsnow.com