Builder buydowns 101: How to find new construction deals

Due to the Thanksgiving holiday, ResiClub will follow a limited content schedule this week, with one more article scheduled for tomorrow. Additionally, ResiClub Pro members can anticipate one more article this weekend, featuring a deep dive into county-level inventory data.

The last time we entered Thanksgiving with housing affordability (considering incomes, house prices, and mortgage rates) being this strained, was all the way back in 1984, just a few months after the debut of "Gremlins" and when mortgage rates still exceeded 13%. While it's undoubtedly a challenging time for would-be homebuyers, the next two ResiClub issues are dedicated to discussing potential deals that buyers can still find in today's housing market. The idea is that these might be great talking points to bring up during Thanksgiving if the discussion turns to housing.

Today: Homebuilder incentives/buydowns

In response to the ongoing mortgage rate shock, builders across much of the country have adopted a strategic approach to stimulate home sales by offering net effective price cuts. They’ve pulled back some on their profit margins in order to sell more homes. This approach stands in stark contrast to the existing home market, where home sellers in most markets, especially in the Midwest and Northeast, have resisted moving down much on price.

While some builders have resorted to straightforward price reductions or cash incentives upon closing, the preferred tactic among many prominent builders is offering mortgage rate buydowns. These buydowns, varying in duration, have demonstrated their potential to incentivize buyers. Some offer temporary rate reductions for the initial years, while others extend the benefit throughout the entire loan term.

Look no further than PulteGroup, a homebuilder ranked No. 259 on the Fortune 500, which presently promotes a fixed mortgage rate of 5.75% in select communities. Not too shabby considering the average 30-year fixed mortgage rate is currently at 7.33%.

According to PulteGroup’s website, the “offer available [is] only on certain inventory homes that contract after 10/30/23 and close by 12/29/23…. based on a conventional 30-year fixed rate mortgage, sales price of $500,000, loan amount of $400,000 with a 20% down payment, buyer with FICO score of 780. Additional closing costs will apply.”

The challenging part about buydowns?

There isn't an online platform that consolidates all current homebuilder buydowns/incentives into one place, and these buydowns (both in terms of size and duration) vary significantly by market and builder. Even within the same builder, the deals (or lack thereof) can vary significantly by community. Communities where builders face challenges in selling their properties typically offer more enticing incentives.

How can you find these deals? First find out what homebuilders operate in your desired market. Then search their websites for nearby communities.

For instance, here’s what comes up when you search “D.R. Horton Cincinnati” in Google 👇

If you were to then click an individual community like, say, “Lakefield Place Goshen Township, OH” you’d be taken to the page where D.R. Horton, a builder ranked No. 120 on the Fortune 500, advertises available deals for that community 👇

For the “Lakefield Place Goshen Township, OH” community, D.R. Horton currently lists a “6.25% fixed rate conventional mortgage” or a “5.99% fixed rate FHA mortgage.” D.R. Horton goes on, in the fine print, to further detail the offer.

The factor enabling these prominent homebuilders, such as D.R. Horton and PulteGroup, to implement such aggressive buydowns is their ongoing strong profit margins. These profit margins continue to exceed pre-pandemic levels, providing them with the financial flexibility necessary to engage in strategic efforts to boost sales and make homeownership more attainable in these turbulent times.

Tomorrow's ResiClub issue looks at a startup that helps would-be homebuyers locate homes for sale in which the seller has a mortgage that is eligible to be "assumable." An assumable mortgage allows the buyer to take over the seller's mortgage payment/rate. It can be a “back door” to a 4%, 3%, or even a 2% mortgage rate.

As always, nothing in this article is investment advice. Please do your own research.