While buyers have more choices than ever when picking a mortgage to get them into their dream home, having so many different varieties may deter them from buying a home.
“Consumers across markets like straightforward, tangible, and easily understandable discounts and incentives,” says Andrew Wilson, principal, advisory in Atlanta, for Zonda. “Most prefer conventional options and are wary of newer adjustable rates and buydown products that are less familiar.”
The number of choices, ironically, may be making it more difficult for consumers to picture themselves making the leap into home ownership as they navigate higher rates. After decreasing at the beginning of 2023, mortgage interest rates have inched up for four consecutive weeks, averaging 6.65% as of March 2.
The fluctuations in the mortgage market are adding to the uncertainty among prospective buyers and further straining affordability concerns.
“Lower mortgage rates back in January brought buyers back into the market,” says Freddie Mac chief economist Sam Khater. “Now that rates are moving up, affordability is hindered and making it difficult for potential buyers to act, particularly for repeat buyers with existing mortgages at less than half of current rates.”
The increase in mortgage rates to levels consistent with those seen in November has resulted in a pullback from buyers. According to the Mortgage Bankers Association (MBA), mortgage applications decreased 5.7% from a week earlier. The week prior, applications decreased 13.3%.
“After a brief revival in application activity in January when mortgage rates dropped to 6.2%, there has now been three straight weeks of declines in applications as mortgage rates have jumped 50 basis points over the past month,” said Joel Kan, MBA’s vice president and deputy chief economist. “Both purchase and refinance applications declined last week, with the purchase index at a 28-year low for the second consecutive week.”
Kan says purchase applications for the week ending Feb. 24 were 44% lower than a year ago, when mortgage rates averaged 3.76%, according to Freddie Mac. The upward trend in rates may continue further, as Kan says data on inflation, employment, and economic activity indicates inflation may not be cooling as quickly as anticipated.
According to preliminary data from Zonda’s monthly builder survey, after a strong start to February, some builders are reporting activity slowed in response to mortgage rates inching higher.
To help combat affordability concerns, builders have rolled out mortgage- and price-related incentives to help bring buyers off the sidelines. Zonda survey data indicated that 32% of builders lowered prices month over month in January as many search for market-clearing prices and 57.6% of active projects are offering to-be-built incentives, accounting for an average of 4% off the list price.
Mortgage-rate buydowns that lower rates into the mid-4% range to low-5% range are resonating with buyers as well, particularly potential move-up buyers who may have locked in a rate during the low-rate periods.
Greg Austin, executive vice president of mortgage lending for Carrington Mortgage Services, says borrowers “love buydowns” because the cost must be paid by the seller or builder and the loan type offers lower rates in the short term before being converted to a traditional fixed-rate loan after the specified period.
During the home builder’s recent first quarter earnings call, PulteGroup president and CEO Ryan Marshall said rate buydowns remained among the top incentives for prospective buyers, allowing many to exit the sidelines in the higher-rate environment. It’s the same at Tri Pointe Homes, according to chief marketing officer Linda Mamet.
“We’re finding a lot of our move-up buyers are interested in programs like temporary rate buydowns, like a 3-2-1 rate buydown, so that they’re getting a very attractive first-year rate with the idea that they could refinance again in the future, but get a lower rate initially,” Mamet said on the home builder’s recent fourth quarter earnings call.
In addition to rate buydowns, adjustable-rate mortgages (ARMs) are options for buyers looking to lower monthly payments initially. According to the MBA, the ARM share of activity for the week ended Feb. 24 increased to 8.1% of total applications.
During KB Home’s recent fourth quarter earnings call, CEO Jeff Mezger said while the majority of KBHS Home Loan customers used fixed-rate products, the company saw an uptick in customers using adjustable-rate products in an attempt to take advantage of lower rates.
However, while options such as rate buydowns and ARMs—mortgages with an interest rate that changes at predetermined times—are prevalent on the market, many consumers gravitate toward conventional financing options.
Austin says while experienced or seasoned borrowers are aware of ARM or buydown loans, younger and first-time buyers are typically more unfamiliar with such loan-type options. However, due to economic conditions contributing to higher monthly payments, Austin says consumers are being introduced to and considering alternatives.
“A straightforward 30- or 15-year fixed rate is what is desired most by a borrower. Unfortunately, market conditions may change that,” says Austin. “Consider this: A buyer desperately wants a certain home, but at a fixed rate, they feel the payment may be more than they want, [and] enter an ARM or a buydown loan.”
