Homebuilders are boosting incentives as they suddenly struggle to sell homes

Contractors work on the roof of a house under construction in the Stillpointe subdivision in Sumter, South Carolina, on Tuesday, July 6, 2021.

After two years of not being able to build homes fast enough to keep up with demand, the nation's homebuilders are now experiencing a slowdown in sales

According to a report Tuesday from the U.S. Census, sales of new homes fell more than 8% in June from the prior month. At the end of last year, the inventory was 5.6 months, but at the end of this year it's 9.3 months.

The chief executives of major builders say they need to respond more quickly to the sudden downturn in the market.

Pulte Group reported Tuesday that net new orders for its homes in the second quarter were lower than last year. The company had a cancelation rate of 15%.

We have to do more to sell homes. Ryan Marshall said on the conference call that Pulte needs to be more flexible. Home price appreciation has slowed or stopped due to the use of incentives. In the second quarter, incentives were mostly tied to the mortgage, but now include discounts on options and premiums.

The median price of a home sold in June was $400,200, up from a year ago. The market had been increasing prices. Land prices are starting to adjust to lower commodity prices, which is helping builders.

The rise in mortgage rates and inflation have caused buyers to see sticker shock. The average rate on the 30-year fixed mortgage started this year at 3%. After jumping over 4% in June, it settled back in the 5% range.

It was mid-June when we saw this kind of pull back. On CNBC's "Squawk on the Street," Doug Bauer, CEO of Tripointe Home, said that his sales people had gone from order takers to financial therapists.

The builder is giving more incentives to buyers.

As we match up mortgage payments with pricing, there will be some price discovery.

Existing homes prices are starting to go back to normal. Home price gains slowed for the second month in a row in May, according to the S&P Case-Shiller index. There is not enough supply in the existing home market. The builders had been speeding up construction, but that has suddenly stopped.

It may be the beginning of a difficult stretch for the homebuilding industry. Builders are bracing for rougher road ahead, even as the housing market remains hungry for more inventory with long run demand staying put, because of decreasing housing permits and starts activity.