Echoes of the past: Homebuilders resurrect 80s-era buydowns in response to housing affordability pressures

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While some homebuilders have responded to spiked mortgage rates by doing straightforward price reductions or cash incentives, the preferred affordability adjustment this cycle among many prominent builders is offering mortgage rate buydowns.

Look no further than Lennar, a homebuilder ranked No. 119 on the Fortune 500, which is presently promoting a "FHA Buydown Program featuring a rate of 3.75% in Year 1" in Colorado and after that a “4.75% for the balance of the term.”

Of course, these buydowns are hardly a new concept—they’re an echo of the past. In the early 80s, homebuilders faced affordability strains much like today, and builders turned to mortgage rate buydowns then, as they do now in 2024.

Earlier this week, Ryan Lundquist, an appraiser in Sacramento, tweeted a homebuilder ad that ran in the Sacramento Bee on August 19, 1980. The builder was advertising a 9.75% mortgage rate at a time when the 30-year fixed mortgage rate averaged 12.95%.

While big builders have so far absorbed the mortgage rate shock and "found the market" by offering affordability adjustments like mortgage buydowns, they have seen a pull back in profit margins.

But here's the interesting part: While builder margins have fallen from the highs of the Pandemic Housing Boom, most are still above pre-pandemic levels.

Click here to view an interactive version of the chart below

D.R. Horton—America’s largest publicly traded homebuilder—gross margin by calendar year quarter, according to S&P Global:

Q4 2018: 20.19%

Q4 2019: 21.49%

Q4 2020: 25.34%

Q4 2021: 28.86%

Q4 2022: 25.77%

Q4 2023: 24.41%

On Thursday, April 18, D.R. Horton will report its fiscal Q2 2024/calendar year Q1 2024 result.

The average 30-year fixed mortgage rate, as calculated by Mortgage News Daily, jumped to 7.34% today following the warmer than expected inflation reading. That’s the highest mortgage rate reading since November 20, 2023.

Over the weekend ResiClub PRO members got an inventory update for over 800 metros and 3,000 counties. The update included several interactive maps and charts, as well as access to the raw analysis/data in the Lance Lambert Inventory Tracker.