Homebuilders Tackle Elevated New Home Inventories

New home inventory has reached 9.8 months of supply as of June 2025, marking the highest level since the 2009 financial crisis and creating significant pressure on homebuilders. With 511,000 new houses for sale at the end of June—an 8.5% increase from the same period last year—builders are grappling with the most challenging inventory situation in over a decade.

New home inventory rose to 9.8 months in June 2025, the highest level since 2009
This inventory accumulation represents a 16.7% increase in months of supply compared to June 2024’s 8.4 months, pushing the market well beyond the 6-month threshold typically considered balanced. That said, the current environment still offers strong opportunities for the homebuilding sector, as this article discusses.

The most pressing concern for builders lies in completed, unsold homes, which reached 119,000 units in May 2025—the highest level since July 2009. This represents a dramatic increase from just 33,000 completed unsold homes in May 2021, illustrating how rapidly market conditions have shifted.

Builder Executives Respond: Strategic Adjustments

Lennar co-CEO Stuart Miller addressed the inventory challenge during the company’s Q2 2025 earnings call, explaining their volume-first strategy: “While our margin and earnings have been adjusting and of course, falling in order to accommodate the realities of the housing market conditions, we remain focused on volume and evenflow production to enable rationalized cost structure and overhead in order to find a floor and rebuild margin even as the overall housing market continues to soften”.

The company’s incentive spending reached 13% of final sales price in Q2 2025, a significant increase from 1.5% during the pandemic housing boom in Q2 2022. Co-CEO Jon Jaffe emphasized their collaborative approach: “Our trade partners know that we are doing this to maintain production levels. Our trade partners work with us to reduce their operating costs and when needed to lower their margins”.

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Some builder clients we have spoken with are gnashing their teeth over Lennar’s aggressive pricing in the face of weak sales. Especially in Florida, builders fret that Lennar is sacrificing margin in order to maintain margin and market share.

D.R. Horton: Managing Through Market Transition

D.R. Horton CEO Paul Romanowski was transparent about their incentive-driven approach during their July 2025 earnings call: “We expect our sales incentives to remain elevated and increase further during the fourth quarter, the extent to which will depend on the strength of demand during the remainder of summer, changes in mortgage interest rates and other market conditions”.

Despite the poor results this selling season, Romanowski maintained confidence in their strategy: “The incentives have increased as we have discussed. That’s why we anticipated a slightly lower gross margin for the fourth quarter, but it appears to be functioning effectively in terms of driving traffic and achieving the incremental sales we need”.

In our own work, performing market studies for the builders, the incentives (particularly mortgage-rate buydowns) worked very well at first, but are having less of a stimulative effect on sales now.

PulteGroup: Focus on Consumer Confidence

PulteGroup CEO Ryan Marshall highlighted broader market psychology beyond pricing pressures: “Feedback from would-be homebuyers indicates a variety of concerns ranging from affordability and the inability to sell an existing home to a slowing economy and the fear of potentially losing their job. Consumer confidence is uncertain at best and confidence is something that’s difficult to solve with a lower price or higher incentive”.

The “house-to-sell” problem is a major one, and it vexes most builders around the country.

Multiple Factors Drove the Inventory Build-Up

Affordability Constraints
With mortgage rates near 7%, monthly payments on typical homes have become prohibitive for many buyers. The 30-year fixed mortgage rate averaged 6.72% as of July 31, 2025, more than double the sub-3% rates during the pandemic boom. Many buyers were rendered unable to buy the home that they had signed an agreement to buy, because the mortgage payment was out of reach at the new level of interest rates. Cancellation rates rose, and homes that had been sold had to be re-marketed by the builder.

Regional Concentration Patterns
The inventory accumulation is particularly pronounced in SunBelt markets that experienced rapid construction growth during the pandemic. Markets like Denver (+100.0% vs. pre-pandemic), Austin (+69.0%), and Seattle (+60.9%) lead the nation in inventory recovery, while Northeast and Midwest markets remain more supply-constrained.

Builder Response Through Pricing Strategies
Builders are responding with unprecedented pricing flexibility. 38% of builders reported cutting prices in July 2025—the highest percentage since NAHB began tracking this metric. Additionally, 62% of builders are using sales incentives with the average price reduction at 5%.

Market data shows 19.1% of listings featured reduced prices in May 2025, the highest share for any May since at least 2016, with metros like Phoenix (31.3%), Tampa (29.9%), and Denver (29.4%) leading in price reductions.

Impact on Builder Sentiment and Operations
The NAHB Housing Market Index reflects these inventory pressures, registering 33 in July 2025 and marking 15 consecutive months below the 50-point threshold. The buyer traffic component scored just 20—the lowest reading since late 2022—while current sales conditions registered 36 and future sales expectations reached 43.

These readings demonstrate that builders’ outlook remains cautious despite ongoing inventory management efforts, with traffic concerns being particularly acute.

Long-Term Housing Supply Fundamentals Remain Strong

While current inventory levels present near-term challenges, the underlying housing shortage that has developed over more than a decade remains a critical factor supporting long-term demand. According to recent analyses, the United States faces a housing deficit of at least one million homes.

This shortage stems from more than a decade of underbuilding following the Great Recession, when construction activity remained well below historical norms relative to household formation. Realtor.com’s analysis found that at the current pace, closing the housing gap would take an estimated 7.5 years nationwide, highlighting the persistent supply-demand imbalance.

The National Association of Home Builders estimates a continuing housing deficit of 1.5 million homes, with construction levels still below historical norms despite recent improvements. Harvard’s Joint Center for Housing Studies reinforces this view, noting that while single-family construction saw a 7% increase in production in 2024, there remains a 1.5 million shortage of rental and owner homes.

It may seem contradictory: we have a surplus of new home inventory yet a shortage of housing. The explanation is that the current oversupply of unsold inventory is temporary, and it is being “fixed” by the builders as they market those homes as “quick-move-in” homes with special incentives. Inventories will not remain this high for much longer, as the gap between aggregate home production and aggregate home demand persists.

Positive Outlook: Recovery Potential with (Possible) Rate Relief

Part of the reason that home sales are so slow in the Sun Belt is what I call the “unwinding of the pull-forward effect.” That is a mouthful, so I’ll explain in three points.

1) Sales (particularly in Florida and Texas) that would have occurred in 2025 actually were pulled forward to 2022. During Covid, many people sped up the purchase they were already contemplating (this applies mainly to retirees or pre-retirees who have flexibility on timing). So, 2024/2025 suffered.
2) A pulling forward event is a one-time thing. It does not weigh down the market forever. It is now just starting to unwind and revert.
3) This suggests that this headwind will subside fairly soon.

Overall, the current inventory situation, while challenging in the near term, positions the homebuilding industry for potential recovery as inventory conditions normalize (new-home inventories and resale inventories). Mortgage rate forecasts suggest that some modest level of relief could lie ahead, with housing authorities projecting rates to decline to the 6.2% – 6.5% range by 2026.

Fannie Mae’s latest forecast anticipates mortgage rates ending 2025 at 6.4% and 2026 at 6.0%, while the National Association of Realtors notes that rates below 6% would bring approximately 5.5 million additional households within reach of homeownership. Such rate improvements would significantly enhance affordability and drive demand recovery, but the odds that mortgage rates will dip under 6% are slim, given the outlook for the federal deficit.

While the current high inventory levels require careful navigation, the fundamental shortage of housing supply relative to long-term demographic demand will provide a strong foundation for future growth once affordability constraints ease and buyer confidence returns to the market. And, if things start to go better for the builders, they will be able to rein in the expensive incentives like mortgage rate buydowns, which will start to help their margins.