The housing market did not escape the pain and contraction experienced by the US economy in April 2020 as a result of the lockdown orders issued by state and local governments to mitigate the effects of the COVID-19 pandemic. Builder confidence posted a historic decline and there were broad declines for housing starts.
In recent weeks, there has been anecdotal evidence about builders lowering home prices, but the latest NAHB/Wells Fargo Housing Market Index (HMI) survey provides factual data: nationally, about 22% of builders cut home prices in April 2020 in order to bolster sales and/or limit cancellations. Regionally, builders in the South (26%) and Midwest (23%) were the most likely to have reduced prices, compared with much smaller shares in the West (13%) and Northeast (12%).
Historically, the 22% of builders reducing home prices in April 2020 is less than half the share who cut prices during the last housing recession: 52% in May 2007 and 49% in March 2008 (Figure 1).
Builders who did reduce home prices in April 2020 cut them by an average of 5%. That discount is smaller than the average price cuts in both May 2007 (7%) and March 2008 (8%) (Figure 2).
Only 12% of builders think price discounts are ‘very effective’ in bolstering sales/limiting cancellations. For 58% they are only ‘somewhat effective,’ and for 17% they are ‘not at all effective.’ The remaining 13% are not sure about the effectiveness of home price reductions.