Builders are increasing incentives as new home sales decline

After struggling to keep up with demand for much of the last two years, U.S. home builders say they’re now seeing a slowdown in sales, resulting in a backlog of homes they’re struggling to sell.

Sales of newly built homes fell more than 8% in June from the prior month and were down 17% from a year ago, 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. For instance, Pulte Group, one of the U.S.’s largest homebuilders, said this week that net new orders for its homes in the second quarter were lower by 23% from last year. The company’s cancellation 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 Chief Executive 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.”

Buyers have been encumbered by a sharp rise in mortgage rates and inflation in the overall economy, which has made home buying more expensive. 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.