Long lead times to complete new homes have combined with rapidly rising interest rates, now at 15-year highs, to put metro Denver homebuilders and their customers in a predicament unlike any seen since the housing bust.

“People thought they were getting a 3% interest rate on their 30-year mortgages and now they are looking at above 6%,” said Ricarda Dietsch, Denver Division president at Taylor Morrison. Make that closer to 7% as of Friday.

Few lenders are willing to lock in a mortgage rate for as long as it can take to build a home, leaving buyers vulnerable to a sharp move in interest rates. Buyers are facing mortgage payments far above what they expected and are backing out in droves, sometimes blaming the builders for taking so long, rather than the Federal Reserve for hiking rates so quickly as they surrender deposits.

Up until April, the share of contracts getting abandoned in metro Denver was under 15%, and people remained desperate to purchase a home, any home, John Covert, who tracks the Denver market for real estate research firm Zonda, said during a presentation in August. Builders responded by ramping up production. But by the end of July cancellations had soared to 45%. More recently, around a third of contracts were failing. But that was before the latest spike in rates.

Given the rise in mortgage rates the past month, from 6% to 6.8%, someone buying a median-priced home in metro Denver at $624,226 with 20% down can expect to pay $271 more a month, said Alex Lacter, a spokesman with Zillow. A monthly payment that was just below $3,000 a month is now solidly above that.

Dietsch said Taylor Morrison has had some success in finding new buyers able to handle payments at higher rates to replace those who are dropping out. Wealthier buyers relocating from other states are less interest-rate sensitive, and local move-up buyers have some equity to leverage after the big run-up in prices.

But overall, far fewer customers are visiting sales offices and touring model homes. Those who do are less likely to sign on the dotted line as they wait for things to settle down.

“We have seen a dramatic shift in the number of people walking through the door,” said Danielle Davis, vice president of sales & marketing at McStain Neighborhoods. “It has been one of those things where people fear buying at the top of the market. They don’t want to be perceived by those around them as having made a bad choice at the wrong time. We are seeing a lot of hesitancy.”

Davis describes what the new home market has suffered as a “sucker punch,” one that has builders and consumers alike stunned and trying to catch their breath and figure out what to do next.

One of the upsides is that buyers ready to pull the trigger can get a new home much faster than was the case just a few months ago, Dietsch and Davis said. If they step in early enough in the process, they can still pick out finishes and get a more tailored product. And while builders remain hesitant to lower prices, they are helping customers by buying down their interest rates, saving them tens of thousands on the monthly payment.

David said if builders are caught with too much inventory, the prices for existing homes could briefly surpass new, similar to what happened in the auto market during the pandemic. Anyone entering a new home sales office has a good chance of hearing a new common mantra — “Marry the house, date the interest rate.” Put another way, buy what you want now and refinance later when rates are lower.

It takes 10 months on average, and up to 18 months in some cases, between when a contract is signed to when the keys of a new home are handed over. The long lead times reflect a backlog in obtaining government approvals, labor shortages and ongoing disruptions in the supply chain that have left contractors waiting for garage doors earlier this summer and now stove vents.

The window is long for things to go wrong, and they have gone wrong. The market went from one where buyers, frustrated by bidding wars and a low supply of existing homes, clamored to get new homes to one where more are essentially priced out of homes they agreed to buy and fearful of a downturn.

“Six months ago you had a lot of buyers in the market, tripping over each other and fighting to buy a house. You had this frenzy in this market and people were paying crazy money for housing,” said Stephen Tindle, president of the Colorado division of Thomas James Homes.

Marketing and sales were easy and construction was hard, Tindle said. Now the equation has flipped. Lumber prices have collapsed to pre-pandemic levels and skilled workers are easier to find. Finding consumers willing to buy —  that’s a different story.

KB Homes, one of the nation’s largest homebuilders, said in its recent earnings report that net new home orders were down by half in the second quarter. Builders across the board are having to pull back.

Stuart Miller, executive chairman at Lennar Corp., told investors on Sept. 22 that the sharp rise in interest rates has affected both affordability and psychology, triggering a pullback in demand for new homes.

“Sales have clearly been impacted by rising interest rates, but there remains a significant national shortage of housing, especially workforce housing, and demand remains strong as we navigate the rebalance between price and interest rates,” Miller said.

The cutback in construction, while not unexpected, will only exacerbate a chronic housing shortage. Housing starts in metro Denver, one of the leading cities for new home construction, only reached about two-thirds of the 2006 peak despite very robust demand, record-low mortgage rates and a larger population, Covert notes.

Colorado remains 127,000 homes and apartments short of what is needed to comfortably house its population, and that shortfall has driven up home prices and rents and prevented young adults from moving out on their own, according to a report from Up For Growth, an advocacy group pushing for more construction.

One of the confounding things about higher rates is that they make it harder to provide homes to the starter home market. Buyers in that segment, because they tend to borrow a larger share of the purchase price, are more sensitive to higher rates.

“Our concern has always been, and remains, that the most economically challenged households face the strongest consequences. My sense tells me that this environment makes their circumstances considerably worse, even if housing prices correct some,” said Phyllis Resnick, executive director of the Colorado Futures Center, which tracks housing affordability and the larger economy.

Covert said the sales of new townhomes and duplexes had been rising rapidly, up 23% year-over-year in metro Denver as buyers were getting increasingly priced out of the existing home market. More of that denser housing was also being developed out in the suburbs than in the past.

There is a shortage of housing at every price point, and builders will likely focus on where qualified buyers are most likely to show up as they try to get through a difficult stretch, Dietsch said.

Thomas James buys up older homes in need of significant repairs in Denver neighborhoods and replaces them with semi-custom homes based on a dozen floor plans. Given the lack of land to build new single-family homes in Denver, and the popularity to live in some of the city’s more popular neighborhoods, Tindle expects the demand will hold up for what his company is offering.

Davis said McStain was in the fortunate position of having lending partners willing to extend long-term locks on mortgage rates, and that has resulted in fewer cancellations than what Zonda is capturing. But she concedes that builders are nervous, and a few of those who were overextended might not survive.

“Nobody is happy, but I don’t sense the same panic internally as I did in 2008,” she said.

The demand for housing and the new supply of housing is being curtailed by higher interest rates. The unknown is which one will be curtailed more, Resnick said. Unlike the Great Recession, it doesn’t look like the capacity to create new homes will be destroyed.

“We have been in an unhealthy housing market for 18 months and this is a healthy adjustment,” Dietsch said. But getting through the next 6 to 9 months could prove very bumpy for anyone involved in U.S. housing markets.