In this episode of the REconomy Podcast™, Chief Economist Mark Fleming and Deputy Chief Economist Odeta Kushi dig into their 2026 outlook for the new-home market, framing how homebuilders remain well positioned in the competition for buyers with the existing-home market in the year ahead. However, that advantage may become harder to sustain as inventory and affordability in the existing-home market gradually improve.

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Listen to the REconomy Podcast™ Episode 133:

“The new-home market has been the flexible part of housing. Builders can flex incentives, product mix, and housing starts, but those levers have costs and limits.”
Odeta Kushi, Deputy Chief Economist, First American

Transcript: 

Odeta Kushi - Hello and welcome to episode 133 of The REconomy Podcast, where we discuss economic issues that impact real estate, housing, and affordability. I am Odeta Kushi, deputy chief economist at First American, and here with me is Mark Fleming, chief economist at First American.

Hi, Mark. Today, we are going to lay the foundation for the new-home outlook, frame why builders are leaning on incentives, and see where the market might creak in 2026.

Mark Fleming - Hi, Odeta. “Frame,” “foundation.” Could you fit any more homebuilding puns into that sentence?

Odeta Kushi - I just wanted to reinforce today’s theme, but I will try to keep this episode up to code.

Mark Fleming - I feel like we could fit rebar in here somewhere, but that was already a lot.

Odeta Kushi - Yeah, yeah, I get it. We will stop now before listeners file a permit complaint.

Mark Fleming - Good, because this conversation was starting to feel a little overbuilt. Okay, now we are really done.

Odeta Kushi - We are really done because we do need to get to the data. We want to start with the fact that new-home sales have been doing better than resales. Builders are leaning on incentives, and we want to unpack the outlook for the new-home market, what rate buydowns really mean for prices and margins, and what this means for supply.

Mark Fleming - New-home sales through the latest data in 2025 have been about 14 percent above pre-pandemic norms, while existing home sales have been nearly 25 percent below pre-pandemic norms. New-home sales have been surprisingly resilient, but the fine print is doing a lot of work here.

Odeta Kushi - The resale market is still constrained by the lock-in effect. Homeowners with low mortgage rates have less incentive to move, so existing inventory remains historically tight, though it has improved. Builders, on the other hand, can create inventory and create affordability.

Mark Fleming - They can build it in. They cannot change the 30-year mortgage rate, but they can change your monthly payment. It is a choose-your-own-rate adventure in housing right now.

Odeta Kushi - I cannot tell if that was a subtle 1980s reference or not.

Mark Fleming - It absolutely was.

Odeta Kushi - Well done, and very early into the episode. The data supports what you are describing. New-home sales jumped to an 800,000 seasonally adjusted annual rate in August, the highest since early 2022. The Census Bureau reminds us that early estimates can be revised, so it takes time to establish a trend.

Mark Fleming - Economist translation: nice print, but do not tattoo it. Even smoothing through volatility, new-home sales have held up because builders are the only group actively selling affordability.

Odeta Kushi - That was painful, but it is true. Incentives are the tell. In December, the National Association of Home Builders reported that 67 percent of builders were using incentives, the highest share in the post-COVID period, with about 40 percent cutting prices.

Mark Fleming - Incentives are not just a perk. They are market-clearing, which is why we should take them seriously as a signal of demand versus supply.

Odeta Kushi - define incentives, because it is not just a free refrigerator. Incentives include mortgage rate buydowns that can be temporary or permanent, closing cost credits, and upgrades, such as design packages, appliances, or landscaping.

Mark Fleming - Rate incentives are clearly the star because buyers shop the payment, not the price.

Odeta Kushi - Builders prefer buydowns over broad price cuts because price cuts reset comps, create appraisal issues, and raise fairness concerns for buyers already under contract.

Mark Fleming - That is when you get the call asking why a neighbor got a better deal.

Odeta Kushi - Instead, builders keep headline prices steadier and shift concessions into financing. We have also seen price cuts, which is one reason the new- versus existing-home price gap has shrunk. The traditional premium on new homes has essentially disappeared, changing the competitive landscape.

Mark Fleming - Incentives can act like a price cut without showing up on the sticker. Median price data can be misleading because list prices may look stable, while effective prices soften through concessions.

Odeta Kushi - A builder buydown is when the builder funds a closing credit that reduces the buyer’s mortgage payment, either by paying discount points for a permanently lower rate or by subsidizing the first year or two of payments in a temporary buydown.

Mark Fleming - Permanent buydowns are more expensive and matter for margins. Buying down a 30-year mortgage rate by one percentage point can cost builders roughly 3.5 percent of margin.

Odeta Kushi - Builders do not price incentives as market rate minus a fixed amount. They market menu rates such as 3.99 percent or 4.99 percent. If market rates fall, the gap they are subsidizing shrinks, reducing pressure on margins. Playbooks also differ by builder. At the higher end, according to analysis of Toll Brothers fourth quarter earnings from Evercore, Toll Brothers reported incentives around 8 percent, or about 80,000 dollars per home, and said rate buydowns had a relatively low take rate because higher-end buyers often prefer to use incentive dollars on upgrades.

Mark Fleming - Of course. I will take the chef’s kitchen over a quarter point off my rate.

Odeta Kushi - Love a chef’s kitchen. Meanwhile, more rate-sensitive, volume-focused builders tend to lean harder on financing. Lennar said demand was challenged and incentives remained elevated around 14 percent.

Mark Fleming - Fourteen percent is not just a free refrigerator. That is extremely motivated sellers trying to move inventory.

Odeta Kushi - There is also a second layer here, which is how builders fund these incentives. Some large builders have used forward purchase commitments, often referred to as FPCs, to deliver larger financing concessions. That matters because there are guardrails. Concession limits vary by loan type, and depending on structure, some builders may be closer to those limits than others.

Mark Fleming - There are real guardrails. There is no free lunch.

Odeta Kushi - Another estimate from Evercore and AEI suggests that for some builders, roughly 20 percent of sales could have been above concession limits if certain buydown costs were included, while other builders were far less exposed. The bottom line is that the incentive lever cannot be pulled indefinitely.

Mark Fleming - Any good economist knows that nothing is unlimited. We are the people of scarcity.

Odeta Kushi - That is right. Now let us connect incentives to supply, because the outlook depends on inventory and housing starts. When we talk about inventory, it is really completed and under-construction homes that pressure pricing more than not-started units sitting on a spreadsheet.

Mark Fleming - I like that, not-started units sitting on a spreadsheet. Builders have responded by slowing starts. Single-family starts fell to an 890,000 pace in August, based on the latest construction data available at the time of recording. That is down nearly 12 percent from a year ago. Homes under construction were also down year over year, another sign that builders are managing the pipeline.

Less future new homes for sale means less risk of oversupply.

Odeta Kushi - And, of course, there are regional variations.

Mark Fleming - Real estate is local. Year-to-date combined starts were up in the Midwest and Northeast, but down in the South, while the West was roughly flat. Permits, which are our leading indicator, were down year to date in every region.

Odeta Kushi - I knew there was something to that adage. Which matters because the South is sort of the volume engine for new construction. If starts and permits cool there that can help prevent inventories from ballooning, even if monthly sales sort of bounce around.

Mark Fleming - And this connects to another key point: demand isn’t only math, it’s sentiment. Even when rates move down, buyers don’t always show up in proportion, especially if they’re feeling uncertain about the economy or their job. Buyers need confidence, not just calculators.

Odeta Kushi - Yeah, this is a point we talk about a lot. It’s not just the math. It’s also buyer sentiment. Before we do the formal outlook, let’s connect this to what listeners actually experience. If you’re someone shopping new construction, two homes with the same list price can have very different all-in economics depending on whether the builder is buying down your rate, covering closing costs, or giving you options. That’s why it’s worth comparing the monthly payment and the cash to close, not just the sticker price.

Mark Fleming - And, for existing-home sellers, this matters too, because when new home incentives rise and the new-home price premium compresses, builders become tougher competition at the margin, especially for homes that look and feel similar.

Odeta Kushi - Right. And another builder nuance is incentives don’t have to mean selling more specs. Some builders are actually trying to tilt away from spec and toward build-to-order. KB noted that gross margins are three to five percentage points higher on build-to-order sales than on spec, so they’re targeting a much higher build-to-order mix over time.

Mark Fleming - That’s the less inventory risk, more customization strategy.

Odeta Kushi - Right. And that’s also where cycle times matter. Faster build times make build-to-order more compelling because the wait-time gap shrinks. We’ve also seen builders highlight improvements in cycle times. Somewhat incremental, but helpful for capital efficiency and flexibility.

Mark Fleming - All of those faster turns help margins and flexibility. They don’t necessarily eliminate rate sensitivity.

Odeta Kushi - This is true. Before we wrap this conversation on cycle times, I want to make sure we touch on productivity. Single-family construction productivity has really stalled over the past three-plus decades. Productivity, from your Econ 101 class, is computed as output divided by input.

When we look at construction productivity data going back to 1987, we see productivity rise from 2000 to 2005, primarily driven by a large increase in output. Beginning in 2005, output fell through 2009 at a faster rate than hours worked, which means productivity declined during the housing collapse years. Productivity then increased from 2009 to 2013 and weakened through 2019. More recently, productivity rose in 2020 and 2021, fell in 2022 and 2023, and then rose again in 2024.

In 2024, productivity increased 6.1 percent, driven by a 5.9 percent increase in output while hours worked remained relatively steady. Zooming out across the full history, productivity in 2024 is essentially at the same level as it was in 1987.

Mark Fleming - So no AI disruptors yet in construction productivity since 1987. You still need more hammers at work to build more homes. Okay, outlook time, Odeta. Give me a base case, tailwinds, and what could go wrong.

Odeta Kushi - Well, we are dismal economists, so we do need to include that part. As a base case, we’d say new-home sales remain relatively supported compared with resales because builders can bridge affordability with incentives. Builder sentiment is still subdued, so we should expect cautious production and continued incentives.

Mark Fleming - And, if you don’t mind, since I’m the optimist, I’ll do the tailwinds. If mortgage rates drift lower or even just stop rising, the cost of buydowns can fall and relieve margin pressure. Slower starts and softer permits should gradually work down excess spec pressure.

Odeta Kushi - Okay. And Debbie Downturn is back with the headwinds and downside. Incentives are already high, and there are practical limits to concessions. If rates move higher again, the affordability bridge gets more expensive. Mo’ money, mo’ problems. Some builders may have to choose between preserving margins and preserving volumes. And if sentiment stays shaky, lower rates alone may not generate a big demand pop.

Mark Fleming - Wait a second, I had to let you finish, but is that a subtle ‘90s rap reference? “Mo’ money, mo’ problems,” Odeta?

Odeta Kushi - You know, I decided if you get the ‘80s, I’m calling 2026 the year of my ‘90s references.

Mark Fleming - And so, with great trepidation, the year begins.

Odeta Kushi - Indeed it does. And one final takeaway for the episode: the new-home market has been the flexible part of housing. Builders can flex incentives, product mix, and housing starts, but those levers have costs and limits.

Mark Fleming - 
And, if you’re listening and thinking, “I just want a house,” remember builders can be the most negotiable sellers in a locked-in market. You may not see it as a price cut, but you might feel it in the monthly payment.

Odeta Kushi - Nailed it. Sorry, couldn’t resist one more pun. Thank you for joining us on this episode of The REconomy Podcast. If you have an economics-related question you’d like us to feature in the future, email economics@firstam.com. And, as always, if you can’t wait for the next episode, subscribe to our Econ Center at firstam.com/economics or connect with us on LinkedIn. Until next time.

Thank you for listening, and we hope you enjoyed this episode of The REconomy Podcast from First American. We're pleased to offer you even more economic content at firstam.com/economics. This episode is copyright 2025 by First American Financial Corporation. All rights reserved.

This transcript has been edited for clarity.