As mortgage rates began to spike last year, homebuilders across much of the country began to reduce their profit margins—which had grown to record levels during the boom—to do things that would entice buyers back into the market. For some builders, that meant offering aggressive rate buydowns, which in some cases lowered buyers’ mortgage rate below 5%. In some communities, it required cutting prices by 5%, 10%, or even 15%.
Many of the best builder deals disappeared earlier this year as the U.S. housing market started to show signs of life amid the seasonally stronger spring and summer windows.
However, the fact that the mortgage rate shock has regained bite just as the housing market entered into the seasonality softer fall window has translated into many homebuilders once again rolling out juicer incentives.
Look no further than Lennar, a homebuilder ranked No. 119 on the Fortune 500, which is presently promoting a “fixed [mortgage] rate of 4.25%” in Colorado for buyers who “sign a purchase agreement on a select move-in ready home in Colorado between 09/18/23 and 09/25/23 and close by 10/31/23.” That’s quite the mortgage rate buydown considering that on Tuesday the average 30-year fixed mortgage rate sat at 7.30%.
The fact that big homebuilders, including Lennar, still have profit margins that are well above pre-pandemic levels gives them wiggle room to offer aggressive buydowns when needed.
But just because Lennar is offering a 4.25% mortgage rate buydown in Colorado doesn’t mean buyers across the country can find that level of a buydown in their home market.
Among U.S. housing markets, Colorado markets have seen greater softening as a result of strained fundamentals.
“In normal times, we’ll have a 10% to 15% premium over resale [prices] in that ZIP code, it’s that localized…. When the market was running prior to Fed rates going up, and mortgage rates going up, in some locations our premium got as high as 30% over resales in certain areas. So then you’re out of whack with your biggest competition, which is resale. You can do it as long as it works, but once the market starts to normalize, you have to come down. Over time it tends to revert to the means, which is a 10% to 15% premium over resale,” KB Home’s CEO Jeff Mezger recently told Fortune.
Mezger says that Denver—where Lennar is offering its 4.25% mortgage rate buydown—is still their weakest housing market.
“The [housing] market where the premium to resale got too far out there, and the market has been correcting, and it has been difficult for the industry, would be Denver. Where prices just moved very quickly, and moved away from affordability, and we’re continuing to adjust there and demand remains a little more sluggish than average,” Mezger says.
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