(Bloomberg) -- The so-called spec home, a spin on the American dream home with standardized color schemes and toilet fixtures, is falling out of favor with some US builders. While that means deals for buyers, the trend also could wind up as a drag on the economy.
Spec, or speculative, homes are usually more affordable and available much more quickly for people who don’t demand their own personal touches. Since the start of the Covid-19 pandemic, when the supply of previously owned homes hit a historic low, construction of spec homes jumped 41%, Census Bureau data show. Even higher-end firms more accustomed to building homes under contract shifted heavily toward specs, which the industry prefers calling “quick move-ins.”
Today, the market is seeing another pivot as some contractors throttle back production of spec residences, which now account for more than half of all single-family construction. The number of quick move-ins sitting on the market is at its highest level since the Great Recession, and many builders are cutting prices to clear them.
This shift might slow housing starts and blunt the industry’s impact on the economy just as President Donald Trump’s promised tariffs are poised to escalate the prices of construction materials.
“If supply continues to rise, builders will pull back on new housing starts until they clear the backlog of inventory,” said Ali Wolf, chief economist at new-home data researcher Zonda. “If you were going to say, based on supply, should we be waving a green flag, yellow flag or red flag? I’m definitely waving a yellow flag here.”
By definition, a spec home is one built without a purchase contract in place, exposing the firm to some risk if a buyer can’t be found quickly. Generally less profitable than “built-to-order” homes, they are often sold to first-time buyers. Builders are now having to discount them even more. In the Tampa, Florida, market, for example, incentives have grown to 6.1% of local home prices from just over 1% in 2022, Zonda data show.
Builders are starting to cut prices more often in the Sun Belt, said Alex Barron, who runs independent homebuilder analysis firm Housing Research Center LLC. He’s seeing price drops of up to 10% in states like Texas and Florida.
At Atlanta-based PulteGroup Inc., one of the largest US homebuilders, quick move-ins were 53% of production in its fourth quarter, higher than its historic level of around 40% to 45%. So, it’s cutting its rate of spec building, the company said in January.
Other publicly traded companies signaling they’re pulling back on quick move-ins include Pennsylvania-based luxury builder Toll Brothers Inc., where 55% of sales last quarter were spec homes, and Georgia-based Beazer Homes USA Inc., where spec home sales represented nearly 70% of closings in its recently finished quarter, the highest in more than a decade.
“We’re starting to discount now. It’s a good time to buy a home,” said Willy Nunn, one of the biggest private builders in the Tampa, Florida area, who recently switched to building more residences under contract after focusing exclusively on spec homes during the pandemic.
On a recent Friday, it was hard to spot any slowdown in bustling Hoschton, Georgia, a rural community 50 miles northeast of Atlanta that’s quickly filling with people priced out of the city. Construction crews appeared busy filling vacant lots with two-story houses priced at $400,000 to $500,000. But even here, Zillow listings showed several homes scattered about unsold for months and seeing price cuts of up to $20,000.
If contractors cut back meaningfully, it could slow down the building process and boost median home prices. Because of their standardized nature, spec homes often take just four months to build, where a more customized home built under contract might take six months and cost more because of its pricier features. National Association of Home Builders Chief Economist Robert Dietz puts the number of unsold spec homes around 389,000, the highest tally in 17 years.
For now, the Federal Reserve Bank of Atlanta’s GDPNow forecast estimates residential investment will boost the US economy by a marginal amount in the first quarter.
Earlier: US Housing Market Is Cooling Right as a Key Season Kicks Off
It’s a stark about-face for America’s homebuilders, who initially ramped up their spec home production to cope with the pandemic economy and its aftermath. Supply chain shortages caused the cost of construction to soar, so contractors seized on quick move-ins that were cheaper to build.
In addition, the swing in mortgage rates after the Federal Reserve started boosting rates in 2022 boosted the appeal of specs to house hunters. Those who signed a contract on a built-to-order home might have seen their mortgage rates rise from 3% to 6% while waiting for their residences to finish. Buying a finished spec home didn’t guarantee a low rate, but at least you knew what you were getting into.
“A lot of people moved to the Sun Belt,” said Barron, the housing analyst. “And so a lot of these spec homes became very popular. It would be ready in 30 to 60 days, and I can lock in my interest rate right now.”
Builders were happy to oblige, churning out quick move-ins at a breakneck pace. So far, no one’s using the word “glut,” and things would be worse if this were November, rather than heading into the busiest season of the year for home sales, said Zonda’s Wolf.
But the next few months will be key. “For builders to feel comfortable starting homes, they have to feel they can sell homes,” she said.
