In a troubling trend, more buyers are walking away after paying nonrefundable deposits: Builders’ third quarter cancellation rates topped 42 percent, according to Deutsche Bank. It’s more than twice the historical norm.
Wachovia economist Phillip Neuhart blamed this on speculators who, in an unfavorable climate, dropped plans to buy and flip new homes for profit. In response, builders reined in construction and slowed land buys, but still faced inventory creep from cancellations. They responded by cutting prices and offering incentives, which drove down operating margins.
Earlier in the month, some builders expressed hope that the industry was climbing out of its slump, but Neuhart expressed doubt.
“The word ‘bottom’ to me means that we’re coming back up, and we really don’t see it that way,” Neuhart says. “We might be in a trough, but we could be in that trough for some time.”