Pending home sales in October fell to their lowest level since 2001. As mortgage rates edged near multi-decade highs, pending home sales declined 1.5% in October on a month-over-month basis, according to data released Thursday by the National Association of Realtors (NAR). As a result, NAR’s Pending Home Sales Index fell to a reading of 71.4, down from 72.6 in September.
Regionally, the Northeast posted a monthly gain in transactions, but the Midwest, South and West all posted losses. Year over year, all four regions saw a drop in transactions.
Historically high rates harmed the housing market in October
Annualized existing home sales remained below 4 million in October, the lowest rate since 2010. Meanwhile, new home sales posted a better performance as homebuyers pivoted to new construction amid waning existing home supply. New home sales fell 5.6% in October on a month-over-month basis but remained 17.7% above the previous year’s level.
In today’s tough housing market, the rental market is cooling off, giving some relief to homebuyers. The national median rent price fell again in October to $1,729, down from $1,747 in September. It dropped on an annual basis for the sixth consecutive month
NAR chief economist Lawrence Yun is optimistic that declining mortgage rates will help qualify more home buyers in the months ahead, but limited housing inventory will remain the sticking point.
“Multiple offers, of course, yield only one winner, with the rest left to continue their search,” he said in a statement.
Home sales should perform better in 2024 even if affordability remains a challenge
According to Bright MLS’s forecast, mortgage rates will continue to trend downward in 2024, finishing the year at 6.2%. Existing-home sales and housing inventory will increase next year, and home prices will remain stable, said Lisa Sturtevant, the MLS’s chief economist.
It’s no secret that this is a difficult time to buy a home. There is a low supply of homes available for sale, and mortgage rates are also a lot higher than they were just a few years ago. These hurdles are enough to cause many potential buyers to wonder whether now is the right time to buy a home — or whether it makes more sense to stay in their current homes or continue renting instead.
There is one option, though, that may lead some buyers to get a better mortgage rate than they otherwise would have. The secret is to look for new construction and find a builder who is willing to go the extra mile to get buyers into their homes. It might take some time, but with enough patience, you may be able to get a mortgage rate that is lower than the average if you take this route.
Start exploring your mortgage loan options online today.
How new builders can help lower mortgage rates
It may seem counterintuitive that a builder can help you get a lower mortgage rate. Builders are not lenders, after all, and don’t have any direct control over mortgage rates. But they do this by buying points on the mortgage that a potential buyer is offered from a lender.
If this seems confusing, don’t worry – it’s actually pretty simple. Essentially, a person or business that is buying points agrees to pay a fee upfront in order to lower the interest rate offered on a loan, either permanently or temporarily.
For instance, let’s say you are interested in taking out a mortgage for $500,000 and are offered a mortgage rate of 8%. The lender may tell your builder that they will lower the loan rate by 0.25% in exchange for a point, the cost of which is equal to 1% of the total loan.
That means that for $5,000, the lender will knock a quarter of a percentage point off your rate. If the lender and the builder agree to buy down 0.75% off of the rate, that would mean purchasing three points. Those three points would cost about $15,000 in this case. You would then have a mortgage rate of 7.25%, which may seem high, but could be a good deal in today’s rate environment.
Note that many lenders will limit the number of points you or your builder can buy down, however. And, not all rate buydowns are permanent. In many cases, the rate buydown is temporary, meaning that it reduces the mortgage rate for the first couple of years before it increases to the regular rate. It all depends on the rate incentives that the builder is offering.
Start your homebuying journey today by shopping for a mortgage.
Why builders buy down mortgage rates
Builders are a business, and they want to get people into their homes as quickly as possible. They don’t always have the ability to wait out the market the way those selling their homes do. Builders need to offload inventory — and the longer it takes to fill a development, the longer it may take for a builder to move on to new projects.
Builders are especially likely to use this tactic to sell homes to people looking to buy their first home, says Doug Duncan, senior chief economist and vice president at Fannie Mae. These buyers aren’t coming into the sale with any equity, and are more interested in solid financing than in fancy cosmetic touches like “marble countertops and finished basements,” Duncan notes.
What’s more, builders will explain to these potential buyers that they will save them time and effort in the long run.
“They’re going to buy it down to the level that they think it’s going to be refinancable in the next couple of years,” Duncan says.
By lowering the rate now to what might be available via refinancing in a few years, new homeowners can avoid the hassle and cost of the refinancing process down the line.
The bottom line
Mortgage rates are high right now, and it is understandable that some potential buyers are scared off by the prospect of paying too much in interest. Looking for new construction, though, may give you a leg up, as some builders are willing to buy down rates in order to get you into their new homes faster.
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Ben Geier
Ben Geier is a personal finance writer based in Brooklyn, New York.
Mortgage rates have risen to their highest levels in more than 20 years, making it harder to afford a home. And yet, out of necessity or desire, hundreds of thousands of people buy homes every month.
With the 30-year fixed rate topping 7%, NerdWallet asked real estate agents and mortgage loan officers for advice on how home buyers can stretch their homebuying dollars in this time of high interest rates. Here are nine tactics that they suggested.
1. Ask the seller to reduce the mortgage rate
Temporary mortgage rate buydowns have become commonplace since rates surged in early 2022. With a temporary rate buydown, the seller pays a portion of the buyer’s interest payments upfront. This reduces the house payments for the first one, two or three years of ownership.
“This is a common strategy for new-home builders, but it can also be used in the purchase of resale homes,” said John Bianchi, executive vice president for loanDepot. (All sources in this story commented via email.) “Negotiating a temporary buydown with the seller can help soften the blow of high interest rates, reducing your monthly payment for one to three years.”
In one typical setup, the seller’s payment effectively cuts the buyer’s interest rate by 2 percentage points in the first year, and by 1 percentage point in the second year. After that, the buyer pays the full interest rate. This is known as a 2-1 buydown.
Another option is to reduce the mortgage rate permanently, using discount points. One discount point equals 1% of the loan amount; each point typically reduces the interest rate by around 0.25 percentage point.
“Home buyers have an opportunity to get a seller to pay for these methods to lower their interest rate,” said Chuck Vander Stelt, a real estate agent in Valparaiso, Indiana. “Some home buyers should seriously consider offering a more generous price to the seller in exchange for a large closing cost concession and then use those funds to buy down the interest rate as much as possible.”
2. Use part of your down payment to pay down debt
When you apply for a mortgage, the lender considers your total debt payments for the house, car, student loans and credit cards. Sometimes it makes sense to divert some of your intended down payment money to cut the higher-rate debt first, said David Kuiper, vice president and senior mortgage banker for Dart Bank in western Michigan.
“While the mortgage payment will be slightly higher, the total debt/payments is lower, making the proposed purchase more affordable,” Kuiper said.
3. Use home buyer assistance programs
State and local governments sponsor an abundance of programs to make homes affordable for home buyers, especially first-timers. Some programs offer down payment assistance and help with closing costs. Others offer favorable interest rates or tax credits.
Details differ from state to state. Some programs are targeted to certain counties, cities or neighborhoods. Others are intended for specific groups of people, such as teachers, first responders or renters who live in public housing. Some programs have income limits.
4. Ask the seller to finance the purchase
You can give the seller an IOU for part of the home’s value and make monthly payments directly to the seller at an interest rate that’s lower than you could get from a bank. This arrangement is called “seller financing” and has its roots in the early 1980s, when mortgage rates zoomed as high as 18%.
You might wonder why a seller would agree to such a deal. “They will often do this in order to get the price they want,” said Janie Coffey, who leads the Coffey Team with eXp Realty in St. Augustine, Florida. The seller gets full price while you get a break on the interest rate.
Seller financing usually has an end date: Within three, five or 10 years, the buyer must get a mortgage from a lender to pay off the amount owed to the seller. Coffey explained that the type of seller open to this arrangement often has paid off the mortgage “and is OK to wait for their big payoff.”
Seller financing is complex. Use an experienced real estate attorney to draw up the contract.
5. Don’t wait for a rate you like better
“If the right house comes along and the payment is affordable (even if you don’t like the interest rate), you should buy the house,” Kuiper said.
You often hear that you should buy now and refinance someday, after interest rates fall. That’s not Kuiper’s point. His point was this: If mortgage rates fall, more buyers will rush into the market. They’ll make competitive offers and drive home prices higher, “essentially wiping out any advantage of the lower interest rate.”
6. Don’t get distracted by things you don’t need
Some sellers want flexibility about the closing date, would prefer the buyer to make repairs, and are scared of accepting an offer from a buyer who ends up failing to qualify for the mortgage.
Vander Stelt advises staying focused on price with these hassle-avoidant sellers, while being flexible on the rest of the offer on the house. “Do this by offering the best terms you can, including buying the home as-is, a closing date and possession that works best for the seller, and illustrating how strong of a candidate you are to get your mortgage approved,” he said.
You can demonstrate that you’re a strong mortgage candidate by showing a preapproval letter and by sharing financial information, such as account balances that prove you have the cash for the down payment.
7. Buy a house that needs work
Buying a fixer-upper is an old-fashioned, time-tested way to save money. “If you can be patient, it’s worth buying a home that needs work and slowly fixing it up over time or taking a renovation loan to acquire the home and do the work upfront,” said Brian Koss, regional sales director for Movement Mortgage, in Danvers, Massachusetts.
8. Build a house or buy a brand-new one
“Building a new home can provide more certainty around how long you will have to wait to move in, it can provide more cost certainty, and it can save you money in the short and long term by avoiding costly remodels, appliance repairs and unexpected repairs of older parts of the home,” said Jeffrey Ruben, president of WSFS Mortgage in the Greater Philadelphia area.
Buying a new home in a development has some of the same advantages. And today’s buyers have good reason to shop for new construction because there’s a shortage of existing homes for resale.
9. Rent out part of the house
Coffey suggested using an old strategy with a trendy name — house hacking — “buying a property like a duplex, where you live in one unit and rent out the other,” she said.
If you buy a duplex, triplex or quadplex, and you live in one unit, you can include the expected rental income for the others when qualifying for a loan. In some cases, you can qualify for a mortgage using expected rental income from an accessory dwelling unit, such as a basement apartment or a tiny house in the backyard.
If you buy a home today, you’re stuck with high mortgage rates for the time being. But by employing some creativity, you might find a way to afford homeownership.
Tucked alongside a large dorm building on the fringes of Woodbury University’s campus in Burbank is a small but very eye-catching house. The 425-square-foot home is contained by a gently curving concrete form equipped with a generous porch and a dramatic sloping roof. Slender, carefully staggered floor-to-ceiling windows gently illuminate the interior.
It’s a nice piece of architecture. What makes it truly remarkable is who built it — and how.
The Solar Futures House, as it is formally known, was designed by Woodbury architecture students and constructed out of concrete using the latest 3-D printing technology. It is the first such permitted structure in the city of Los Angeles, according to Woodbury architecture dean Heather Flood. And it was built by Emergent, a 3-D printing construction firm based in Redding. (A quick geography explainer: While Woodbury has a Burbank address, a piece of the campus, where the house was built, is located within Los Angeles city limits — hence the L.A. permits.)
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Most notable is how quickly this project came to fruition. “It was 15 months from design, going through the permitting process with the city, working with the printing company and dealing with 14 atmospheric storms,” says Kishani De Silva, chair of the construction management program at Woodbury, who served as faculty lead on the project. “It came to life on the 12th of May. … The next day the students literally graduated.”
From design to near completion in 15 months? In bureaucratic Los Angeles, that counts as damn near miraculous.
Certainly, it helped that students were collaborating with municipal experts from the Mayor’s Office of Energy and Sustainability, the Bureau of Engineering and a nonprofit clean tech incubator at the Los Angeles Department of Water and Power — organizations that could help navigate the red tape. But at a time when our region is gripped by a housing and homelessness crisis, it is nonetheless a model worth examining.
To be clear, the house is not 100% complete — though it’s awfully close. A couple of the interior areas are still in need of drywall, and some exterior features and the landscaping remain unfinished. Moreover, the building will require a certificate of occupancy from L.A.’s Department of Building and Safety.
But it is an impressive piece of design, achieving a lot in a small space.
The layers of 3-D-printed concrete give the walls a geologic look, and the curving shape and high ceilings prevent this intimately scaled studio from feeling like a shoebox. In addition, the covered porch and the living room are connected by a sliding door; throw it open and the space feels bigger and airier.
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And, true to its name, this is a structure that prioritizes environmental concerns.
The Solar Futures House began as an entry in the Solar Decathlon, a national collegiate competition organized by the U.S. Department of Energy that encourages budding designers to create high-performance structures powered by renewable energy.
In the spring of 2022, a class of Woodbury students submitted a design proposal and was selected as one of 14 finalists, receiving a $50,000 grant for construction. By the fall of that year, the team was breaking ground.
The structure they proceeded to build was all about efficiency. Shower water is recirculated for toilet flushing. The home’s bending form and sloped roof are designed to respond to the angle of the sun over the course of the year, thereby maximizing the generation of solar power. Currently, the structure features one solar array on the roof, which makes the building net zero (meaning no additional electricity is needed to power the home). Add another and it becomes net-positive, supplying energy to the grid.
The angled roof is made out of a reflective, resin-coated metal and sits atop 9 inches of mineral wool insulation, which helps preserve the building’s interior temperatures and buffer external noise. (Woodbury’s campus sits next to the 5 freeway, but between the double-layer concrete walls, the triple-glazed windows and the insulation, the house feels peaceful.) Mineral wool insulation also functions as a fire barrier — addressing another environmental concern in California.
To mitigate the use of concrete, which is carbon-intensive, the team developed a formula that contained a higher percentage of fly ash, making it more sustainable. The precise nature of 3-D printing also means that no concrete goes to waste.
This new construction method allowed for the speedy erection of the building’s double-layer walls: De Silva estimates that printing took about three days. It also let students play with form. In a traditional stick-build structure, 90-degree angles are the most efficient way for walls to meet. But 3-D printing allows for more flexible shapes; hence the curving walls, which give the house a more organic feel. Take the bathroom: Designed to be compliant with the Americans With Disabilities Act, it is no afterthought — it’s tucked into an attractive rounded room that also includes laundry facilities.
Naturally, the DOE’s grant didn’t cover all of the costs.
Flood estimates that the budget for the house currently stands at about $250,000, including in-kind support and donated services from area firms. L.A.-based Nous Engineering pitched in on the structural work, while Breen Design Group in Torrance helped with the mechanical systems; Mitsubishi Electric donated an HVAC system and Ikea supplied furnishings.
The Solar Futures House is a significant achievement — especially considering that Woodbury is a small school (with fewer than 1,000 undergraduates) and its accredited architecture program is relatively new, established in 1994. The university serves students primarily from Southern California, many of them Latino, making it a designated Hispanic-Serving Institution. (The school plays a critical role in diversifying the field, since architecture remains overwhelmingly white.)
Two dozen students worked on the Solar Futures House over a period of two academic years, rotating in and out of the project as part of their coursework. But a number of them were able to see it through from beginning to end, including Karin Najarian and Jade Royer; Sergio Santos was able to work on the home throughout the entire final year.
The Solar Futures House soon will be habitable; university administrators are debating how it might be used. Possibilities include a guest house for visiting speakers or a residence for a housing-insecure student.
Whatever its ultimate purpose, the home will continue to function as a teaching tool. “It’s a prototype for a method of design and construction and the actual shape and form could be varied,” says Flood. “It could conform to many different site conditions. You can nest multiple units together in a way that would take advantage of structural efficiencies.” (Construction companies already have begun to create two-story structures using 3-D printing technology.)
Woodbury students will be able to take this initial concept and run with it, refining and adapting it to suit the needs of other constituencies, such as the elderly.
The house may be almost complete, but the ideas that informed it are just beginning to take off.
To learn more about the Solar Futures House, and keep up on any upcoming public events, check the project’s website at solar.woodbury.edu.
Mortgage rates dropped for the fourth consecutive week, indicating they may have peaked and convincing some homebuyers to trickle back to the market.
The average rate on the 30-year fixed mortgage declined to 7.29% from 7.44% the week prior, according to Freddie Mac on Wednesday. That marks a half-point decline since the end of October, when the rate hit 7.79%.
The recent rate relief was enough to pull some buyers from the sidelines — even entry-level ones who had been priced out. Still, home prices and rates remain elevated as the inventory chokehold continues, crushing affordability.
Read more: Mortgage rates at 20-year high: Is 2023 a good time to buy a house?
“The Freddie Mac fixed rate for a 30-year mortgage eased further this week, as mixed data continue to keep investors guessing,” Danielle Hale, Realtor.com chief economist, said. “In a few short weeks, mortgage rates have largely erased the sharp climb traversed in October. Nevertheless, the cost of borrowing remains high. Except for the most recent seven weeks, today’s rate is the highest since 2000.”
First-time buyers navigate the market
The volume of mortgage applications for a home purchase increased 4% on a seasonally adjusted basis for the week ending Nov. 17, the Mortgage Bankers Association (MBA) reported Wednesday.
The share of home loans backed by the Federal Housing Administration, or FHA — a popular financing option for first-time homebuyers — increased to 14.8% of all loan applications from 14.4% the prior week. The average loan size for a purchase application was $403,600, the lowest since January 2023.
“This is consistent with other sources of home sales data showing a gradually increasing first-time homebuyer share,” Joel Kan, MBA’s deputy chief economist, said in a press release.
Many first-time buyers are also turning to new construction in the supply-constrained market. The number of new residential construction increased 1.9% monthly to 1.372 million units in October on a seasonally adjusted basis, beating expectations.
But that is far from enough, as demand heavily outweighs supply. The volume of mortgage applications is 20% lower than the same week a year ago, MBA says.
The expensive market has shut out many moderate-income households, giving chances to only higher-income households with a median salary of $107,000, an uptick from last year’s $88,000, a report by National Association of Realtors (NAR) shows.
“Among our first-time homebuyers we saw that their household income rose nearly $25,000 just from the previous year,” Brandi Snowden, director of consumer survey research at NAR, told Yahoo Finance. “They might be needing to add that extra income just to be able to get into the homeownership market.”
While the Federal Reserve has kept its benchmark interest rate between 5.25% to 5.5% in September and October due to moderated inflation, Fed Chair Jerome Powell said more rate hikes are possible if that’s what it takes to bring inflation down to the central bank’s 2% target.
Read more: What the Fed rate-hike pause means for mortgage rates and loans
Higher rates would only complicate the housing market because many homeowners are not selling their homes because they don’t want to lose their current low mortgage rate. Just over 4 in 5 homeowners with mortgages have an interest rate below 5%, and roughly one-quarter have a rate below 3%, Redfin previously reported.
But one expert believes mortgage rates may have already peaked.
“I believe we’ve already reached the peak in terms of interest rates,” Lawrence Yun, NAR’s chief economist, said during the 2023 NAR NXT conference. “The question is when are rates going to come down [more]?”
Rebecca Chen is a reporter for Yahoo Finance and previously worked as an investment tax certified public accountant (CPA).
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Mortgage rates dropped significantly in the last few weeks, but the cost of borrowing remains high prompting many homebuyers to wait for even lower rates.
The 30-year, fixed mortgage rate averaged 7.29% for the week ending Nov. 22, according to Freddie Mac‘s Primary Mortgage Market Survey. That’s down significantly from last week’s 7.44% and up from 6.58% the same week a year ago.
HousingWire’s Mortgage Rates Center showed Optimal Blue’s average 30-year fixed rate on conventional loans at 7.283% on Wednesday.
“In recent weeks, rates have dropped by half a percent, but potential homebuyers continue to hold out for lower rates and more inventory,” Sam Khater, Freddie Mac’s chief economist, said in a statement. “This dynamic is reflected in the latest data showing that existing home sales have fallen to a thirteen-year low.”
New construction starts and permits showed surprising strength in October while existing-home sales slumped to their worst reading since 2010.
Except for the last seven weeks, current mortgage rates hit their highest levels since 2000. As a result, rates have to fall further to spur more demand from homebuyers who are grappling with affordability pressures.
“If rates can hold onto this improvement, or notch a further decline, however, this could mean that ‘buying a home’ does seem like a viable new year’s resolution to a greater number of households,” Realtor.com Chief Economist Danielle Hale said in an emailed statement.
Both of the key metrics for residential construction, housing permits, and housing starts, beat analysts’ expectations in October. The U.S. Census Bureau and Department of Housing and Urban Development said permits rose 1.1 percent compared to September while housing starts increased by 1.5 percent.
Permits were issued at a seasonally adjusted annual rate of 1.487 million units compared to 1.471 million units in September. The September estimate was only a slight revision from the 1.473 million originally reported. Analysts polled by Econoday had estimated that permits would come in at 1.463 million units.
The permits issued in October 2023 were 4.4 percent fewer than the 1.555 million permits authorized in October 2022.
The annual rate of permitting for single-family houses was 968,000 units, 0.5 percent higher than the 963,000 units in September and an improvement of 13.9 percent year-over-year. Multifamily permits increased by 2.2 percent to 469,000 but dropped 27.9 percent compared to October 2022.
On a non-adjusted basis, there were 124,000 permits issued last month, 79,700 of which were for single-family houses, an improvement on the relative numbers in September of 116,700 and 76,500. Permits for the first nine months of 2023 total 1.252 million, down 13.8 percent from the same period last year. The 773,600 permits for single-family houses are a reduction of 10.6 percent from the same period last year and the 432,300 multifamily represent a decrease of 20.1 percent.
Privately-owned housing starts were at a seasonally adjusted annual rate of 1.372 million units compared to 1.346 million units in September, a downward revision from the 1.358 million units reported in October. Starts remained lower on an annual basis, in this case by 4.2 percent. Analysts had estimated that housing starts would be at a 1.350 million annual rate.
Single-family construction starts were at an annualized rate of 970,000 units, annualized, compared to 968,000 units in September and 858,000 units in October 2022, gains of 0.2 and 13.1 percent, respectively. Multifamily starts increased by 4.9 percent compared to September but were 31.8 percent lower year-over-year.
There were 115,400 residential construction starts in October, units 900 fewer than in September. Single-family starts were flat at 81,400.
Thus far in 2023, there have been 1.194 million residential units started, 11.3 percent fewer than by the end of October 2022. Single-family starts have declined from 884,200 to 790,600 and multifamily starts at 392,00 are down 12.4 percent.
Robert Dietz, chief economist of the National Association of Home Builders (NAHB) commented on the Census Bureau report. “Despite higher interest rates in October, the lack of existing home inventory supported demand for new construction in the fall. NAHB is forecasting improving conditions for single-family home building, as the 10-year Treasury rate has returned to near 4.5 percent, with an outright gain for single-family starts in 2024.” NAHB, however, is forecasting a decline for multifamily construction in 2024.
There were 122,200 homes completed in October, including 85,400 single-family houses and 36,000 multifamily units. Completions for the year-to-date total 1.190 million units, a 5.0 percent annual increase. Single-family completions are down 1.7 percent to 819,600 units but 361,000 multifamily units have come online, a 23.6 percent increase.
At the end of October, there were 1.674 million residential units under construction, 669,000 of which were single-family houses. There were an additional 281,000 permits outstanding, exactly half of which were for single-family units.
In the Northeast region, permits were 15.6 percent higher than in September and 12.5 percent above the October 2022 rate. Starts dropped by 14.5 percent from the previous month and 24.5 percent compared to a year earlier. Completions were 1.0 percent higher than the prior October.
The Midwest saw a decline in permits of 10.6 percent for the month and 21.8 percent year-over-year. Starts were 28.4 percent and 5.2 percent higher than the two earlier periods. Nine percent fewer units came online than in October 2022.
Permitting rose in the South by 3.1 percent but lagged the prior October rate by 5.3 percent. Construction starts fell 6.8 percent and 8.1 percent. Completions were down 1.7 percent on an annual basis.
There was a 1.7 percent dip in permitting in the West, but the rate rose 3.6 percent on an annual basis. Starts grew 12.5 percent from the prior month’s level and were 4.7 percent higher than in October 2022. Completions dropped 16.6 percent year-over-year.
Starts for construction of housing projects with five units or more posted a 4.9% increase to a rate of 382,000 units last month, while residential investment also saw a welcome increase for the first time in 10 quarters. With interest rates having surged over the past 20 months, homebuying demand has remained somewhat muted throughout … [Read more…]
Curiously, however, new residential home sales surged in September while existing home sales all but completely froze because owners are reluctant to move and buy another home at a far higher mortgage rate. New-home sales rose 12.3% to an annual rate of 759,000 in September, up from 676,000 in the prior month, the Commerce Department said Wednesday.
Since there are so few existing homes on the market, buyers find themselves having almost no choice but to buy new. Builders, also under pressure from high interest rates, are sweetening the pot, however, by offering discounted mortgages and other incentives. In fact, Devyn Bachman, senior vice president of research with John Burns Research and Consulting, credits these enticements as the “number one” driver for the rising new home sales figure last month.
“‘Incentive’ is just a big fancy word for discount, and what we’re seeing on that front is that it’s what’s creating a competitive advantage for the new-home market,” she tells Fortune. The mortgage rate buydown, the industry term for discounted mortgage rates, is the most “desired and most effective” incentive offered in the new-home market today, she adds.
Independent sellers usually cannot match these types of incentives, typically offered by large builders like Lennar and Toll Brothers, Erin Sykes, chief economist at residential real estate brokerage firm Nest Seekers International, tells Fortune.
Mortgage rate buydowns explained
As high as mortgage rates may seem now, there’s little indication that they’ll drop significantly anytime soon—meaning in the next two to three years. Capital Economics, for example, released a report this week saying not to expect 6%-and-below mortgage rates until the end of 2025.
Mortgage rates hovering around 8% are a stretch for many borrowers, which is why a mortgage rate buydown can be an enticing option for eager prospective homebuyers. There are a few different types of mortgage rate buydowns, Bachman explains, with full-term buydowns and temporary buydowns being the most popular options among builders.
A full-term buydown is the more desirable option for buyers because the builder buys down the mortgage rate for the entire life of the loan. In other words, builders pre-pay the difference in interest between the market mortgage rate and the mortgage rate they’re offering, Bachman says.
Currently, some builders are offering buydowns as low as 5%, mostly in “peripheral, emerging” markets, Sykes says. This includes places like Loxahatchee, Fla., and Boynton Beach, Fla., which are both within 30 minutes of Palm Beach.
During the past week, mortgage rates hovered around 8%, “so when you’re talking about buying into the [5% range] that’s a huge advantage for the new construction market,” Bachman says. For a temporary rate buydown, the builder still buys down the rate, but it’s not for the entire life of the loan. Rather, the builder would pay a lump sum to reduce the mortgage rate for the first one to three years of the loan. After that, buyers would be subject to higher mortgage rates. Many builders that offer these programs have partnerships with certain mortgage companies or have their own mortgage arm.
Other builder incentives
Builders are also offering other incentives, including covering up to tens of thousands of dollars in closing costs, which can be particularly helpful for first-time homebuyers who struggle to save up enough.
“That gets at the heart of the affordability issue that we’re seeing in the marketplace today,” Bachman says. “Like, I just can’t close because I don’t have the cash to do so.”
Builders have also started building more “spec” construction as opposed to “to-be-built” homes. This is important because rate locks can be “incredibly expensive,” Bachman says. Rate locks mean that the mortgage rate between the time of offer on the newly built home won’t change between the offer and the closing. However, a rate lock can cost 0.25% to 0.5% of a mortgage, amounting to potentially thousands of dollars in extra costs for buyers in the form of a cash deposit.
The to-be-built model, in which buyers choose their plot of land and all of the finishes on the home before construction starts, is traditional in homebuilding. The issue is that when it’s finally time to close the deal months down the line, mortgage rates may have risen. Rate locks can prevent this.
However, with spec construction, builders start construction without having a buyer, and once finished (or near finished), they put the home on the market. That gives buyers a better idea of what their mortgage rate will be at the time of purchase.
“Honestly, to remain competitive in today’s new construction landscape, most builders are offering mortgage-rate buyouts paired with other incentives,” Bachman says. “Now, I will caveat this whole thing by saying, if we get to a place where the market starts to kind of halt, this is a riskier business model.”
She continued: “Why? Because the builders are starting homes that there’s not necessarily a contract or a consumer attached to.”
While mortgage rate buydowns and other incentives may be responsible for rising new-home sales today, Dan Green, CEO of first-time homebuyer mortgage company Homebuyer.com, tells Fortune that there are other factors at play—including low existing home inventory. With so few existing homes on the market, buyers have few options but to pursue new construction.
“Incentives and buydowns may be playing a role, but the more likely reason why new construction home sales are surging is that it’s all that buyers can buy,” he says. “It’s too tough to find a home resale.”
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Mortgage demand for new homes jumped in October as the inventory for existing homes remained depleted.
Mortgage applications for new-home purchases rose 39.7% in October on a year-over-year basis and were up 6% from the previous month, according to the Mortgage Bankers Association (MBA) Builder Application Survey for October.
“Home builders have been able to temper this high-rate environment by offering buyers rate buydowns and other incentives,” Joel Kan, MBA’s vice president and deputy chief economist, said in a statement. “We estimate that the pace of home sales increased for the third straight month to a 715,000-unit annual pace — the strongest sales month since May 2023.”
FHA applications reached highest share of new-home applications since 2013
In October, FHA applications represented 26.3% of all new-home purchase applications as homebuyers turned to new construction for more housing options. This is the highest share of FHA new-home purchase applications in a decade.
Conventional loans made up 63.6% of new-home mortgage applications while VA loans comprised 9.8% of new-home loan applications in October.
The average loan size for new homes was $390,225 in October, down from $397,550 in September
According to MBA estimates, new, single-family home sales were at a seasonally adjusted annual rate of 715,000 units in October. That’s up 12.8% from the September pace of 634,000 units. On an unadjusted basis, MBA estimates that there were 55,000 new-home sales in October 2023, up 7.8% from 51,000 sales in September.
However, higher mortgage rates sank builder confidence again in October, which fell to 40. In September, the sales pace of new homes climbed 12.3% compared to August, reaching a seasonally adjusted annual rate of 759,000. The data for new home sales is scheduled for Nov. 27.
MBA’s survey tracks new-home mortgage application volume from mortgage subsidiaries of homebuilders across the country.