Southeast

Southern Squeeze: 3 Ways Southeast Builders Are Adjusting to the Affordability Crunch

Kevin Cody
Cara Lavender Headshot photo

Kevin Cody

Jesse McConnico

Cara Lavender

December 6, 2023
Carpenter constructing two-story wooden frame house

A double whammy of affordability pressure has hit the Southeast*. First, home prices skyrocketed as an outsized share of the US population moved to the Southeast for lower costs of living and employment opportunities created by corporate relocations. Second, the average 30-year mortgage rate has nearly tripled since its low in 2020. 

Meanwhile, the supply of homes for sale is tight, and demand is steady—with builders in both Charlotte and Atlanta reporting nearly double the national average sales rate. Many residents are being priced out of homeownership, and the pool of potential buyers is shrinking. Here are three ways proactive builders and developers are adapting to maintain sales and make deals pencil:

  1. Offering rate buydowns to attract home shoppers
  2. Adding more spec home inventory
  3. Pivoting strategically on location, home size, and product offerings

 Rate buydowns attract home shoppers. Affordability is the worst it has been in recent memory, and home shoppers are experiencing payment shock. According to the Burns Affordability Index™, which analyzes home-cost-to-income, homeownership in the US is the least affordable it has been for at least 38 years. Elevated home prices surely play a role in this, but mortgage rates sitting at their highest level in more than two decades are also a key contributor. The rate-buydown strategy has proven effective, allowing builders to address affordability concerns and minimize the psychological impact of higher rates for shoppers. While these incentives dampen gross margins, they will be key in maintaining sales. A -2% decrease in mortgage rates would decrease a monthly payment by about -20%.

Adding more spec home inventory can boost sales. Due to a lack of resale listings, builders can use inventory homes to attract buyers who are seeking a quick closing. Building spec homes can expose builders to market risk, but they are also typically easier, faster, and less expensive to build. Per the most recent Burns Home Builder Survey, builders in both Charlotte and Atlanta reported that having inventory homes available is critical to sales. Further, Southeast builders expect 73% of their starts in 2024 to be spec, compared to the national average of 53%.

A strategic pivot on location, home size, and product offerings can address affordability challenges. Finished lots are rare, and bidding wars between builders for land in established locations are common. Undeveloped parcels in A & B locations with public utilities are scarce. Builders can adapt to the evolving market by:

  • Looking at land deals differently. Outlying submarkets will appeal to buyers who have been priced out of more central parts of the metro. The rise of remote working has made these sites accessible to a broader population than ever before.
  • Building smaller homes. Townhomes and smaller detached homes can still meet entry-level buyers’ needs for more space but at a lower price tag. Builders should shrink floor plans strategically to meet evolving consumer preferences.
  • Offering different product types. Explore the build-to-rent market (BTR). BTR communities can attract households that are unable or unwilling to buy a home in the current interest rate environment but would still like to experience single-family living. BTR can also be a good fit for the high-migration metros of the Southeast, as BTR communities are especially appealing to relocators.

The market may be more challenging to navigate today than in previous years, but opportunities remain. Home builders may need to dig deeper into their tool belts to take advantage.

 

To learn more about what is happening in your local market, please get in touch.

 

*JBREC identifies the Southeast as Georgia, North Carolina, South Carolina, Tennessee, Louisiana, Kentucky, Arkansas, and Alabama.

 

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About The Author

Kevin Cody
Kevin Cody
Manager, Consulting
Kevin conducts analysis, research, and field work for consulting engagements for multi-family, for-sale, and build-to-rent developers and investors. He has a proven record in utilizing data analysis and market knowledge to help executives make informed strategic decisions.
Jesse McConnico
Research Manager of Apartments & Build-to-Rent
Jesse is a resident apartment expert. She tracks housing trends across the country with an emphasis on southeast and Florida markets.
Cara Lavender Headshot photo
Cara Lavender
Research Manager, Surveys
Cara provides timely and accurate insights on housing market trends at the metro, regional, and national levels by analyzing emerging qualitative trends and local quantitative drivers to assess their impact on the industry.

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