Looking for a new home? Builders offering valuable incentives to entice homebuyers
LOS ANGELES (AP) — Americans looking to buy a newly built home this spring are likely to get a helping hand with their mortgage rate and other costs.
Many homebuilders are offering buyers valuable incentives like paying down their mortgage rate, covering closing costs or even throwing in 'flex dollars' that home shoppers can put toward upgrades or other costs.
While the sales strategy isn't new, builders are under pressure this year to ramp up such incentives because they're facing a tough spring homebuying season.
Stubbornly high mortgage rates, more competition from existing homes on the market and the realization that years of rising home prices have pushed affordability to the limit for many prospective buyers gives builders little opportunity to ease off the costly incentives.
'They're running into more competition, fewer buyers and increased costs to sell a home,' said Ali Wolf, chief economist at Zonda.
And dialing back incentives may not be easy, as home shoppers have now come to expect them.
'We should anticipate that builder incentives are here to stay,' Wolf said. 'I don't see a world where they don't need them, unless interest rates came down, and most signs point to higher-for-longer with interest rates.'
Elevated mortgage rates and rising prices have kept many prospective home shoppers on the sidelines, especially first-time buyers who don't have equity from an existing home to put toward a purchase. While mortgage rates have eased in recent weeks, the average rate on a 30-year mortgage has been hovering around 7% since November after climbing from a 2-year low of just over 6% in September, according to Freddie Mac.
Builders have increasingly relied on buyer incentives to mitigate the impact of higher borrowing costs on home shoppers as the average rate on a 30-year mortgage more than doubled in recent years from its pandemic-era historic low of 2.65%. Many builders have also lowered prices.
The share of homebuilders that offer sales incentives has ranged between 60% and 64% since June, while between 30% and 33% have lowered prices, according to surveys by the National Association of Home Builders.
The use of buyer incentives helped drive sales of new homes higher last year, while the resale home market remained in a deep slump. Sales of newly built single-family homes rose 2.6% last year to around 1.02 million units, the highest level since 2021, according to data from the U.S. Census Bureau. Sales of previously occupied U.S. homes fell in 2024 to their lowest level in nearly 30 years.
While mortgage buydowns and other incentives can help builders entice buyers, their cost eats into their profit margins. The average operating margin for 12 of the largest homebuilders, including D.R. Horton, PulteGroup and Lennar, was 15.08% in the fourth-quarter, according to data compiled by FactSet. That's down from an average of 16.3% in the same period a year earlier.
The concern now is that builders will have to maintain, if not boost, buyer incentives to continue mitigating the impact of high mortgage rates at a time when home shoppers have a wider selection to choose from. Last month, active listings — a tally that encompasses all homes on the market except those pending a finalized sale — were up 25% from a year earlier, according to Realtor.com.
Rising construction costs and uncertainty over the impact that the Trump administration's trade and immigration policies may have on building materials and labor costs, respectively, are also fueling worries on Wall Street about how well builder profit margins will hold up this year.
'We expect order growth to come at the expense of margins for homebuilders,' analysts at BofA Securities wrote in a recent research note. They also said they expect a 'challenging environment for homebuilders to persist' through the first half of this year.
Concern over builders' profit margins has weighed on the stocks, with many homebuilders off to a downbeat start this year after lagging the overall stock market in 2024.
D.R. Horton, the nation's largest builder by closings, is down around 7.5% this year. Lennar is down 5.6% and NVR is off 10.2%.
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