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After a two-year period where frenzied demand meant home buyers needed little motivation to reach purchasing decisions, incentives began to return to the housing market in spring 2022. As interest rates began to rise and home prices continued to appreciate, prospective home buyers became less willing and able to purchase homes, causing many builders to increase incentive offerings to mitigate market hesitation.
The percentage of builders increasing incentive offerings has grown steadily since April 2022, when 16% of builders reported they increased incentive offerings on a month-over-month basis, according to Zonda data. During Zonda’s most recent Housing Market Update, chief economist Ali Wolf reported that three-quarters of builders increased incentive offerings in August. Top incentive offerings from builders include mortgage rate buydowns, extended rate locks, options and upgrades, and closing costs.
As mortgage rates have continued to climb, Caitlyn Lai-Valenti, vice president of sales and marketing in Southern California for Brookfield Residential Properties, says special financing has gained more strength as an effective incentive for buyers to purchase. For Landsea Homes, chief operating officer Mike Forsum says efforts to remove uncertainty for buyers related to mortgage rates are resonating with customers.
“We have positioned ourselves with Landsea Mortgage to lock in a long-term rate for our homeowners to simplify the guessing game we are currently seeing with interest rates,” Forsum says. “Our extended rate-lock program allows buyers to lock in their interest rate before the ink dries on the contract, making what may seem unpredictable predictable.”
According to Freddie Mac, the 30-year fixed-rate mortgage averaged 6.94% for the week of Oct. 20, an increase of more than 380 basis points on a year-over-year basis. Lai-Valenti says the interest rate doubling on a year-over-year basis translates to an approximately $1,000 per month increase in payment for shoppers, making financing assistance more appealing for prospective buyers.
“The continued rate increases have shifted conversations with prospects. Buyers are very aware of rates, which are always in the news,” Lai-Valenti says. “We offer pricing transparency so there is no mystery about it. However, the sales teams are skilled in educating buyers on the impacts of an interest rate buydown versus a price adjustment. They are ambassadors at offering much more flexible and impactful alternatives than simply turning to price reductions as the solution.”
Rate buydowns have become a popular incentive as mortgage rates have continued to rise in the latter half of 2022. Mike Sander, Dallas division president of HistoryMaker Homes, says the builder, like many others, moved incentive dollars into closing costs to help buy rates down to a more manageable range for home buyers. The HistoryMaker and Brookfield Residential teams, instead of highlighting price cuts, are taking time to help prospective buyers understand all the impacts of payments to find the best option for each situation.
“If payment is the biggest driver of [the home buyer’s] purchase decision, then using incentive dollars toward rate buydowns makes more sense to that customer,” Sander says. “But, if they’re willing to take more risk and say in the future rates will be lower than they are today, then they are looking for a price reduction in lieu of a rate buydown.”
Forsum says Landsea Homes has remained flexible in its incentive offerings, cognizant of confusion among buyers and overall uncertainty in the housing market. He says finding the best fit for incentive dollars for each buyer’s circumstance remains a paramount issue for Landsea.
“As with many other home builders, we have adapted to what the market is demanding. With rising interest rates, there was a big push to offer 2-1 buydowns,” says Forsum. “However, as the market remains unpredictable and rates constantly change, we have to be flexible and responsible.”
The rapid increase and persistence of high mortgage rates have exacerbated existing affordability challenges for potential home buyers, particularly first-time buyers. For first-time buyers, Sander says, education is particularly important to help customers understand how monthly payments can be impacted by different rates.
“The buydowns are especially valuable for first-time buyers: Strategic rate buydowns help families ease into their new payment for the first year or so, while still securing a fixed mortgage,” Lai-Valenti says.
While the rate buydown can be impactful to help bring down the monthly mortgage payment, some builders are finding homeowners are unfamiliar with the positive benefits. During the recent Housing Market Update webinar, Wolf highlighted how for some consumers not tracking rates regularly, the benefits of a rate buydown are not as appealing.
“We’re finding more customers not even willing to use the dollars toward a rate buydown or allowing the builder to buy the rate down, and [those customers] more so are looking for the lowest price possible,” Sander says.
To highlight the benefits of financing options toward monthly payments, many builders, including Landsea Homes, HistoryMaker Homes, and Brookfield Residential, are also providing resources to educate consumers. Landsea has launched "Mortgage Minutes" segments on the company’s social media channels to educate potential homeowners on mortgage opportunities available to them and have team members from its Landsea Mortgage team available to answer any questions from buyers. Brookfield Residential launched a “Make it Happen” marketing campaign, specific to its New Haven community in Southern California, highlighting a flexible range of solutions and educating buyers that, oftentimes, a price reduction is “not always the best way into the home and the community,” Lai-Valenti says.
“The whole mortgage buydown takes a lot of education from our sales counselors with the customer of what that really means for them in the long run and how much they would be saving in the long run,” Sander explains. “The sales presentation has changed in our world. [Instead of] tour[ing] the home right away, [we are] talk[ing] about financial expectations. There’s some sticker shock that is continuing, [and] it gets progressively worse as rates continue to go up, but it’s changed our outlook and strategy with the customer that walks in. To really hit on the payment discussion so they really understand, certainly with a first-time buyer, what a 7% interest rate means today.”
Kentucky-based Drees Homes launched a “Don’t Wait, Great Rate!” promotional campaign in the fall to encourage buyers to continue their home search confidently with full information as interest rates continue to rise. The campaign educates buyers on the nature of a 2-1 buydown: Payments will be based upon an effective interest rate 2% lower than the original in year one and 1% less than the original rate in year two.
For Landsea, the company is also sharing messaging with potential buyers around incentive offerings, though the builder has simplified its messaging to avoid confusing customers.
“Recently, we found that the 2-1 buydown and flexible financing messaging became confusing with so many different messages out there to potential buyers as the market became more competitive,” Forsum says. “We opted to simplify our incentive messaging. Now we are simply putting forward monthly payment messaging, as this is what our home buyers want to know.”
Both HistoryMaker Homes and Landsea Homes have also begun offering homeowners the opportunity to refinance at no cost. HistoryMaker homeowners can refinance within 24 months of purchase with refinance fees waived, should rates decline after the period of purchasing, while Landsea homeowners have the ability to refinance within three years of the original close date at no additional cost.
Forsum and Sander say more builders are also being more transparent with the information shared publicly around price improvements in the high-rate market with customers.
“I’m observing more builders, both in advertisements and on their websites, showing price reduction,” Sander says. “I feel there are a lot more advertisements for price reductions to get back to a price point that people can afford at 6.5% or 7% interest rates.”