The key to their newfound success? Incentivizes.
To bring priced-out buyers off the sidelines, builders are offering aggressive mortgage rate buydowns. By paying a lump sum of money to lenders, builders can temporarily reduce borrowers initial mortgage rate from, say, 6.5% to 5.5%. Indeed, when polled in December, 75% of nationally surveyed homebuilders reported buying down buyers mortgage rates to make payments more affordable, per John Burns Research and Consulting.
And, its clearly working.
As of March, builder cancellation rates averaged 9% nationally, according to John Burns Research and Consulting. Thats much lower than 25% in November. Additionally, sales of newly constructed single-family homes were up 9.6% in March from the previous month, according to a joint report from the U.S. Census Bureau and the U.S. Department of Housing and Urban Development.
But now that the new home market has seemingly stabilized, will builders cut back on incentives, like rate buydowns?
Jody Kahn, senior vice president of research at John Burns Research and Consulting, told Fortune thats the question of the hour. From what shes hearing, in surveying builders, theyre testing the waters, particularly in their better performing housing markets.
Theyre saying in some cases, theyre pulling back a bit on incentives, Kahn said. In some cases, theyre testing small price increases, say a couple $1,000 on the asking price or list price. And in some cases, [they] are doing both. So theyre taking baby steps because they do not want to see a sudden turn off at the spigot where theyve gone too far and just completely lost their sales trajectory.
At least right now, were not likely to see builders pull back on rate buydowns completely, Kahn says. The reason being, buydowns are driving transaction growth as they get buyers over the hump. Although, like Kahn suggested, things have shifted.
Last year, it really did feel like a blanket decision [to offer buydowns], Kahn said. And this year, its starting to feel more selectiveI think they may be more selective, or they might be buying down the rates less.
Following the abnormal Pandemic Housing Boom, the housing market in 2023 seems to be back to a pattern thats feeling pretty normal, Kahn said. That said, the spring season is generally the strongest period of the year. As the market moves out of the spring and into the summer season, which is often slower sales wise, demand could weaken again. Theres also the fact that the housing market is only barely back into equilibrium, especially considering that affordability (or rather the lack of affordability) is at levels unseen since the housing bubble.
Given the seasonality of the market, and the fact that mortgage rates remain above 6%, Kahn expects, well continue to see rate buydowns throughout the year. But again that doesnt mean builders wont be pulling back a bit. Indeed, Kahn expects builders to be more selective with rate buydowns, or limit how far theyll buy down rates.
Theres only one thing, in the short-term, that would push rate buydowns out of the picture completely, and thats lower mortgage rates.
Rate buydowns resurfaced within the last year as mortgage rates jumped from 3% to over 6%. Once rates hit more than 6%, it served as a mental or emotional threshold for a lot of people, Kahn said, but a lot of buyers also couldnt qualify for loans at that rate. In order to improve affordability, many builders are paying to reduce their buyers mortgage rates. However, until rates drop to 5.5%, which seems to be a mental cap for a lot of buyers, were likely going to continue to see rate buydowns through this year and into early next year, Kahn said.
