When does an incentive stop being incentivizing? When consumers have grown accustomed to the price breaks and can’t imagine doing a deal without them in place to lower their costs.
“Popular incentives such as closing cost assistance and mortgage rate buydowns have been particularly effective in addressing affordability challenges, helping sustain demand among price-sensitive buyers,” says Zonda’s chief economist Ali Wolf.
But she warns that consumers may take those incentives for granted ahead of the key spring buying season, making things expensive for builders who have no choice but to woo them with rate buydowns and other perks.
Thanks to builder incentives, the new-home market has had the upper hand over resales in the last few years. These perks have eased the sting of high interest rates and prices for home buyers and helped builders move inventory. Incentives have also bought builders time and have become popular among millennials. Wolf notes that incentives have been a primary driver of new home popularity among this age group.
This is why home builder marketing messages rely heavily on financing and incentive offers, as K. Hovnanian’s chief marketing officer Ron Nelson recently pointed out, even though they are an expensive way to lure buyers into their new homes.
“The new home industry has been selling homes in spite of [high interest rates] because we have the inventory and are able to buy down rates for people,” he says. “From a marketing standpoint, we have been relying heavily on either rate buydowns, discounts, or flex cash. The message has been about financing.”
Holden Lewis, mortgage and home buying expert at NerdWallet, says this puts buyers in the driver’s seat.
“In many markets, inventory is up. So is supply,” he says. “Fewer buyers are getting caught up in bidding competitions. The urgency to buy now is going away. On the other hand, buyers expect incentives in the form of rate buydowns for new construction and price flexibility on existing homes.”
Meanwhile, according to Fannie Mae's most recent Home Purchase Sentiment Index, buyers expect home prices and mortgage rates to go up for the foreseeable future.
“Builders continue to offer interest rate buydowns to get buyers to sign on the dotted line. Buyers have trouble affording new homes when mortgage rates are around 7%,” adds Lewis. “Rather than cutting home prices, builders are offering rate buydowns to reach monthly payments that buyers can afford”
Until affordability challenges subside, builders will continue to reach into their pockets to help drive down prices and convince buyers that now is the time to jump on their dream homes, even if it comes at a high cost.
“While sales for many builders are still meeting expectations, the cost of achieving those sales has become increasingly problematic,” Wolf says. “Given the competitive market and historically low affordability levels, we anticipate that incentives will remain critical in 2025.”
