The Expert Podcast

There’s a new phenomenon in the new home business that is shifting some of the demand from resale homes to new homes. For the last year or so, the demand for homes has dropped off when interest rates spiked up. Part of it had to do with pricing as well. Interest rates were a factor, but people were willing to absorb the higher price as long as they could get a lower interest rate.

What’s happening is new builders are starting to do what’s called "buy-downs." If you’re buying a new home and your interest rate, let’s say, is going to be 6.8% or 7%, they’ll give you a buy-down of your mortgage so that your rate is really only 5% or 4%, closer to where it was three years ago. They’re offering this buy-down either for three years, four years, or maybe for the length of your loan, however long you keep it. This strategy is shifting demand from resale homes to new homes.

It’s also better for the builder because it doesn’t affect comparable sales, and comps are very important. If the comps on a development go down, it’s harder to get the price approved from the lender. For example, let’s say you have a house selling for $680,000 and you discount it by $50,000 down to $630,000. That $630,000 price point becomes established as a comparable sale. When future homes are sold, appraisers take that into account, making it harder to sell homes at a higher price. However, with a mortgage buy-down, while appraisers might factor it in a little, it’s not as significant. Plus, buying down the rate is more effective in lowering payments.

A $50,000 price reduction might reduce the payment by a small amount, but buying down the rate might lower the payment even more significantly. This strategy is luring buyers back, according to reports. Now, let’s look at what’s happening behind the scenes. Sellers are feeling little pressure to lower their pricing.

If you’re an existing homeowner selling your house, you’ve likely seen prices run up from 2020 to early 2022. Now, with less demand and fewer buyers, you might need to discount your house to sell it. But why would you want to sell your house if you have a 3.5% mortgage, equity, and no financial distress forcing a sale? Unlike in 2008 or 2009, homeowners today are in a stronger financial position and can simply decide not to sell.

There are exceptions, like financial distress, job loss, or relocation. But even in these cases, there’s less urgency for a quick short sale. For example, if you’re relocating, you could keep your house, rent it out, and make a profit. If you bought your house for $300,000 in 2015 with a 3.5% mortgage, you could likely rent it for $3,000 per month, while your mortgage payment might be only $1,200. You could also use the property as an Airbnb.

The term “short sale,” coined during the 2008-2009 financial crisis, is rarely heard now because most homeowners have equity. This dynamic has created challenges for new home builders, who need to sell houses to stay in business. To keep their construction pipeline moving and attract buyers, builders are using mortgage rate buy-downs as a key strategy to maintain market share and keep people buying new homes.