Homebuilders Drive Mortgage Rate Purchases as Affordability Sours

  • Mortgage rate purchases are a home financing tool that provides buyers with a lower interest rate.
  • Home builders use rate buyouts the most in areas where home prices are falling the fastest.
  • The volatility in the mortgage market may make the practice more common in the near future.

As high mortgage interest rates continue to deplete new home demand, builders are using creative incentives to attract individual home buyers.

A common trend that developers turn to to help them sell more homes in an increasingly challenging economic environment is to pay prospective buyers to purchase mortgage rates. A rate cut is the prepayment for “discount points” at closing to lower the rate at the maturity of a fixed-rate mortgage. While it may cost thousands of dollars upfront, there is an idea that it will save buyers more money over the life of the loan.

More than 75% of home buyers nationwide are using mortgage discounts to attract more home buyers, according to new research from John Burns Real Estate Consulting. Nearly one-third of home builders surveyed said they purchased the entire 30-year mortgage for their buyers; this can lower mortgage rates by as much as 2% and save the average home buyer thousands of dollars in expenses over the term of the loan.

This means that in a city like Phoenix, on an average home that Realtor.com says costs around $450,000, home builders spend between $22,500 and $27,000 to reduce their buyers’ mortgage loan by 1% or 2% from the current average 6.33% rate. It means.

“We’re having a lot of conversations with home builders about what incentives are particularly effective at attracting new home buyers, and we see that the price cut aspect is really important in attracting new buyers in a slow market,” said Jody Kahn. Senior vice president of research at John Burns told Insider.

Concessions and incentives help builders stay competitive in uncertain times

Of course, builders try other incentives or promotions to help sweeten the deal for buyers. Recently, Lennar Homes, one of the largest builders in the US, tried to organize a Black Friday-like sales promotion to attract new buyers. Other companies, like Taylor Morrison, are offering discounts of $18,000 to $50,000 in hopes of attracting buyers to their Houston, Texas home. And then other builders are offering free or discounted upgrades for skins or device bundles to help get contract homes.

These companies are using concessions to vacate homes at a time when rising mortgage rates and stubborn inflation have caused many home buyers to sit on the sidelines and wait for the market to change in their favour. For example, Redfin’s Home Buyer Demand Index, which measures the volume of home tours and other purchasing-related activities, shows that home buyer demand fell nearly 20% in early December 2022 compared to the same period last year.

Given how much mortgage rates and selling prices have fluctuated in the last six months, many buyers have chosen to cancel contracts for newly built homes (which usually take several months to complete) as a way to reduce risk in the uncertain environment.

Low demand for homes has become particularly dangerous as home builders face economic headwinds that make it more costly to borrow money from banks, from rising labor and material costs to the deteriorating health of capital markets. Meanwhile, the housing supply continues to rise as home builders sit on thousands of unsold homes.

“Home buyer incentives are becoming much more important given that we live in a time when affordability is much weaker due to rising home prices and interest rates, both of which are effectively pricing out many home buyers and especially first-time buyers,” Khan said. .

Homebuilders take a regional approach to mortgage purchase incentives

Despite how pervasive the trend is, more home builders are applying mortgage purchase incentives in areas where home prices are falling the fastest.

For example, data from John Burns Real Estate Consulting shows that over 87% of home builders in the Southwest use acquisitions to attract new buyers. This comes at a time when home prices have dropped 10% or more in cities like Phoenix, San Diego, and Las Vegas.

Headquartered in Phoenix, Arizona, Taylor Morrison is one of the home builders using acquisitions in the southwest. The company offers a so-called 2-1 buyout offering, in which a buyer’s mortgage rate is reduced by 2% in the first year and 1% in the second before returning to a flat rate for the remainder of the loan. According to the company’s website, the incentive covers both traditional and FHA mortgage borrowers with a minimum credit score of 680.

Sheryl Palmer, CEO of Taylor Morrison, appears to be paying a tactical dividend to investors during the company’s Q3 earnings call in October as the company’s cancellation rate remains flat at around 4%, compared to its historical average of about 7%.

“We strongly believe in the value of using finance as a sales tool by offering generous market incentives, rather than simply lowering the price, as the benefits to the buyer are often much greater,” Palmer said.

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