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With housing affordability remaining a top challenge for prospective home buyers, incentives “are still the name of the game for 2024,” according to Zonda chief economist Ali Wolf.

“Incentives address affordability but are also a great marketing method. The buyers most likely to use buydown or funds toward closing costs will be those that are entry-level, lower-income, and local buyers in relocation markets,” Wolf says. “Those buying at higher price points often lean toward flex dollars.”

According to Zonda’s most recent New Home Market Update, 56% of new-home communities offered incentives in January, flat month over month from December. Public builders indicated that incentive offerings—particularly rate buydowns—eased from October, when mortgage rates hovered around 8%, but still remained a part of the strategy to entice home buyers.

“As expected, incentives on closed homes increased to roughly 800 basis points in the fourth quarter of 2023. These higher costs were primarily due to the increased cost of mortgage rate buydowns,” Dale Francescon, chairman and co-CEO of Century Communities, said during the home builder’s fourth quarter earnings call. “With the recent decline in interest rates, we’ve been able to pull back on our level of incentives on new orders in December and January.”

As resale inventory remains limited and the price spread between new and resale homes narrows, new homes are increasingly an attractive value proposition for buyers, with incentives such as rate buydowns a way to help address ongoing affordability challenges. With mortgage rate volatility impacting search parameters, builders have an advantage over the existing market with the ability to offer financing incentives, with rate buydowns remaining particularly attractive for buyers.

The most common incentive offerings include mortgage rate buydowns, funds toward closing costs, and flex dollars, according to Wolf. During Zonda’s division president survey in February, the majority of builders offering mortgage rate buydowns said they were willing and able to buy down fixed rates to the high 4%s through the high 5%s. In October when rates were nearing 8%, 35% of builders were willing to pay to get fixed-rate mortgages to the high 5%s, and nearly 25% were willing to pay to get rates to the low 6%s. In February, just over 20% of builders were willing and able to get fixed rate mortgages to the high 5%s; the share of builders willing to pay to get fixed rates in the mid-5%s, low 5%s, and high 4%s were all between 15% and 20%.

“Buydowns are so common that we almost forget how expensive they are,” Wolf says.

Landsea Homes highlighted the rising costs of rate buydowns during its recent earnings call, with chief financial officer Chris Porter saying costs “increased significantly” as the 10-year treasury spiked to 5% in the fall.

“[The cost of rate buydowns] has remained more stable in the first quarter of this year. Incentives during 2023 averaged between 5% and 6% of our home sales revenue, a sizable increase from 2022 levels,” Porter said. “We expect incentive levels to remain elevated in 2024, with the actual cost fluctuating with the overall mortgage rate environment. Buying down to a 5.99% level seems to be the sweet spot in today’s environment and can range from 3% to 5%, depending on the underlying mortgage rate.”

Regional Incentive Trends

Zonda data indicates that incentives remain prevalent across metro markets, regardless of whether they are significantly underperforming or overperforming historical levels.

As part of its recent Zonda Market Ranking (ZMR)—which accounts for sales pace and volume, is seasonally adjusted, and is taken as a percentage relative to a baseline market average—Zonda tracked the percentage of projects that are offering incentives of any kind in each market.

The analysis suggests that the share of projects offering incentives is highest in Florida markets as well as markets in Arizona and Colorado, as well as select markets in California.

Incentives are offered on 80% of projects or more in Florida’s Cape Coral, Sarasota, Tampa, Port St. Lucie, Orlando, Lakeland, and Jacksonville; Denver and Fort Collins, Colorado; Greenville, South Carolina; Indianapolis; Las Vegas; Phoenix and Tucson, Arizona; Salt Lake City; San Antonio; and California’s San Jose and Riverside/San Bernardino.

The share of projects offering incentives of any kind are lowest in several Mid-Atlantic, Midwest, and Southeast metros: New York (31%), Philadelphia (58%), Richmond, Virginia (55%), Durham, North Carolina (66%), Charlotte, North Carolina (67%), Columbus, Ohio (68%), Chicago (61%), and Washington, D.C. (67%).

In markets that are “significantly underperforming” their historical averages, the share of projects with incentive offerings range from a low of 63% in San Francisco to a high of 81% in San Jose and Salt Lake City. In markets “significantly overperforming” their historical averages, the percentage of projects offering incentives of any kind range from a low of 58% in Philadelphia to a high of 85% in Port St. Lucie.

Different Incentives for Different Buyers

For many public builders, the use of rate buydowns and closing costs are weighted toward entry-level communities and first-time buyers.

“Of the 28% of our fourth quarter closings that took advantage of a mortgage forward commitment or similar interest rate structure, an outsized 50% were first-time buyers,” Taylor Morrison chairman and CEO Sheryl Palmer said during the builder’s earnings call.

Palmer said approximately 20% of Taylor Morrison’s closings in 2023 used some forward commitment, with offerings heavily leaning toward first-time buyers.

“Our incentives are mostly used with our first-time buyers. When I look at markets like Seattle and Sacramento, California, [those] markets very rarely use forward commitments,” Palmer said. “When I look at our resort lifestyle business, we still see a very high penetration of cash. So we’re not using nearly the same incentives for that consumer that we would be using for our first-time and first-time move-up [buyers].”

Tri Pointe Homes CEO Doug Bauer said permanent rate buydowns remain a popular use of incentives for the company’s buyers. Approximately 86% of the home builder’s orders are using some type of financing incentive, with the majority offering a permanent rate buydown versus a temporary buydown.

Conversely, at Toll Brothers, where the average price of homes delivered in the first quarter of 2024 was approximately $1 million, buydowns are “heavily marketed and offered,” but very few Toll Brothers buyers used incentive dollars to buy down rates.

“The vast majority of our customers can qualify for a market-rate mortgage without [a] buydown, and they prefer to use any incentive offered on design studio upgrades or to reduce their closing costs,” Toll Brothers chairman and CEO Douglas Yearley said. “Approximately 25% of our buyers paid all cash in the quarter.”

Landsea Homes president and chief operating officer Mike Forsum said while the entry-level buyer is seeking an affordable home and is driven by incentives to get their monthly payments down, move-up buyers are less mortgage-rate sensitive and timing is their most important consideration.

“For the most part, you’re toggling between actual incentives, mortgage rate buydowns, and deliverability in a specific period of time,” Forsum said. “If you can find that perfect sweet spot, you’re continuing to drive absorptions.”


Plans for Incentives

While incentives will likely remain a key element of the playbook for builders, they expect that as rates continue to stabilize incentive spending may normalize as well.

“I think the more extreme incentivization [from] the fourth quarter to maintain pace looks today as if it’s a thing of the past,” Lennar executive chairman and co-CEO Stuart Miller said during the builder’s recent earnings call.

Meritage Homes CEO Phillippe Lord and executive vice president and chief financial officer Hilla Sferruzza expect the pullback in customer utilization of financing incentives to continue to decline in early 2024, though they will remain an important element for buyers looking for alternatives to the resale market.

LGI Homes chairman and CEO Eric Lipar said he anticipates continuing to incentivize buyers with offerings to get rates “as low as possible,” but “we don’t think that needs to be more than we have been doing in 2023.”

“Because of low supply, I think there is still some pressure on prices being elevated. We’ll continue to use incentive dollars that we put toward the forward mortgage commitments as a tool in 2024,” Ryan Marshall, president and CEO of PulteGroup, said. “As rates fall, we think the cost of those forward mortgage rate commitments will become less. We’ve made an assumption that we [will] reallocate some of those incentive dollars to other things that help solve the affordability challenge and get a buyer into their home.”

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