HOME PURCHASES BY INVESTORS/SPECULATORS surged in 2005, and hot “sellers' market” conditions showed up in record sales, soaring prices, minimal cancellation rates, and thin inventory positions. But eroding affordability conditions and fading investor demand have changed all of that.

In April, the NAHB conducted a nationwide survey of about 500 single-family builders of all sizes, along with a targeted canvass of more than 40 very large companies, to document the extent of change in market conditions since the highs of 2005. We found patterns of fading investor demand, rising cancellation rates, and climbing inventories—particularly at larger builders.

INVENTORIES RISING Forty-three percent of the survey respondents said that their own inventories of unsold homes (whether under construction or completed) had risen during the previous year; only 16 percent said that their inventories had gone down. Seventy-five percent of the very large builders in our canvass reported higher inventories, and 20 percent characterized the rise as “substantial.”

We also asked builders to assess inventories in their markets. Responses were relatively consistent across builder size classes: Nearly 75 percent of all respondents said that inventories were higher than a year earlier, and close to 33 percent called the increase “substantial.”

INVESTORS RETREATING The survey and canvass asked builders about changes in the investor/speculator shares of home sales in their markets since a year earlier. Forty percent of the survey respondents, and nearly 75 percent of the very large builders, reported declines in investor/speculator shares; 40 percent of the very large builders characterized the decline as “substantial.”

For those reporting elevated inventory, we asked if this reflected sales cancellations and/or resales of homes purchased by investors/speculators. Seventeen percent of the survey respondents blamed rising inventories on cancellations; 25 percent thought that resales were at least partly responsible. Among the very large companies, 63 percent blamed rising inventories on cancellations by investors/speculators, and nearly half said that resales by investors were a key cause.

CANCELLATIONS UP Only 20 percent of the survey respondents said that their sales-cancellation rate had gone up during the past year. However, larger builders in the survey reported higher cancellation rates, and 80 percent of the very large builders said that cancellations were up.

We also asked builders about the size of the deposit they require with a signed sales contract and the conditions under which a buyer can get the deposit back in the event of a cancellation. We found a median deposit equal to 5 percent of the sales price across all builder size classes, although a significant number of companies require deposits of 10 percent or more.

The conditions under which deposits can be returned were similar across builder size classes. The most common conditions, in order of importance: buyer could not qualify for financing, buyer could not sell existing home, change in employment (e.g., job loss), and change in family circumstances (e.g., divorce). Only about 10 percent of the survey respondents, and only 7 percent of the very large builders, said that they would give back a deposit if the buyer simply “decided not to purchase a home.” Most cancellations by investors/speculators presumably fall into this category.

A SUGGESTION As we're in a rising-interest-rate environment, builders should find ways to help buyers qualify for financing—such as paying upfront mortgage points and buying down interest rates in the early years of the loan.

Chief Economist, NAHB Washington, D.C.

Learn more about markets featured in this article: Washington, DC.