Housing affordability is so stressed that Lennar is offering a fixed 4.75% mortgage rate in Colorado

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In response to the ongoing mortgage rate shock, homebuilders across much of the country have adopted a strategic approach to stimulate home sales by offering net effective price cuts. This approach stands in stark contrast to the existing home market, where home sellers in most markets, especially in the Midwest and Northeast, have been reluctant to lower their prices.

While some builders have resorted to straightforward price reductions (KB Home CEO Jeffrey Mezger told me that’s his preference) or cash incentives upon closing, the preferred tactic among many prominent builders is offering mortgage rate buydowns outgoing (D.R. Horton CEO David Auld told me that’s his preference). These buydowns, varying in duration, have demonstrated their potential to incentivize potential buyers. Some offer temporary rate reductions for the initial years, while others extend the benefit throughout the entire loan term.

One notable example comes from Lennar, a homebuilder currently ranked No. 119 on the Fortune 500 list. Lennar is actively promoting a conventional loan with a fixed rate of 4.75%, or $33,500 toward closing costs, in select Colorado communities. This offer from Lennar is valid for those “who sign a purchase agreement on a select move-in ready home in Colorado between 10/10/23 and 10/16/23.”

What’s interesting? On September 19th, Lennar was advertising a 4.25% buydown in Colorado. So over the past month, as mortgage rates have ticked closer to 8%, Lennar has moved its buydown from 4.25% to 4.75% in Colorado.

It isn’t just Lennar, take a look at this tweet by Rick Palacios Jr., director of research at John Burns Research and Consulting. It shows that PulteGroup, a homebuilder ranked No. 259 on the Fortune 500, has also pulled back on its buydown offers. Going from 4.99% in April, to 5.75% as of October.

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It appears that some builders are scaling back their buydowns as spiked mortgage rates, which have risen from an average 30-year fixed mortgage rate of 7.15% on August 1st to 7.66% as of today, have increased the cost of offering buydowns over the past two months.

This buydown pullback, and the fact that some borrowers are getting quoted mortgage rates with an 8 handle, could cause new home sales to once again pull back.

Back in early August an Ohio homebuilder told me that “People are definitely used to these [mortgage] rates now… people [homebuyers] are buying dirt thinking [mortgage] rates will be lower by the time their home is done. A total 180 from last year.”

However, when I reached out to that same Columbus-based builder on Monday, he had a more somber tone: "October has been a ghost town. September was very busy but that’s when we run our annual promotion. We were paying 3 points towards financing for homes that can close this year plus some $ off the house"

The factor enabling these prominent homebuilders, such as Lennar and D.R. Horton, 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.

My baseline outlook? If mortgage rates continue to hover around 8%, there will likely be more downward pressure on builder margins, especially if they feel compelled to once again expand affordability adjustments, such as offering more money at closing or even implementing outright price cuts.

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