Rising mortgage interest rates have put growing pressure on would-be homebuyers already facing a very tight inventory of existing homes and stubbornly high prices. If, however, you're open to buying a new construction home, there is some relief.
First, builders are working on filling in some inventory gaps with new construction. Current homeowners are increasingly unwilling to put their houses on the market because they want to keep their low interest rates, but that's not an issue with new construction.
Additionally, builders are willing to incentivize buyers. In June, 56% of builders offered incentives to buyers, up from 54% in May, according to data from the National Association of Home Builders.
In February, D.R. Horton, Lennar, and Pulte, the country's biggest homebuilders, celebrated the highest stock prices they'd seen in a year. Much of this was attributed to incentives.
Builder incentives are something that a developer can offer, like a coupon, which can lower the overall costs of purchasing a home in the community. Incentives are a good way to encourage buyers to make an offer, but they're not as straightforward as simply offering a price cut.
Price cuts can be one approach to incentives, but there are others. For example, helping to reduce financing costs is one way that builders incentivize buyers. This might happen as buying down interest rates and paying a portion or all of the buyer's closing costs.
A buydown on a mortgage can save a few thousand dollars up to tens of thousands on a 30-year mortgage.
Builder incentives aren't a new concept; developers often use them to target particular buyers. For example, when the economy isn't doing well, a builder might offer cash at close and lower interest rates to help buyers qualify. For higher-end developments and communities, the incentive might be something like upgrades to the home.
The builder's preferred lender will handle any financial incentives being offered. Bringing your own lender into the transaction negates builder incentives, but you might get a better interest rate regardless.
If you're thinking about new construction, one of your points of comparison before making an offer should be on available incentives from the builder.
The National Association of Home Builders reported that 29% of builders paid closing costs or fees last winter. Twenty-seven percent offered options or upgrades at reduced costs or no cost, and 26% paid to reduce the interest rate for the buyer temporarily. An estimated 24% of builders paid to reduce buyers' interest rates permanently.
Depending on the builder, incentives can be offered at any project stage. Some incentives occur as soon as construction launches to generate interest and buzz and get the first buyers onboard. There are also incentives added at the end of projects when builders are ready to close things out and only a few homes are left in the community.
General economic conditions can contribute to incentives being offered, which is the case now with the higher interest rates.
Builder incentives are broadly advertised, and often they'll have a time limit so that the builder has flexibility in their offerings. Then, there are incentives that you have to ask for. You or your realtor should always question whether or not there are available incentives when looking at new construction.
Specifically, the most popular current incentives are first an interest rate buydown creating a lower monthly payment, and reducing financing costs for the loan's life. Then, another incentive that's in demand and frequently seen in the current market is extended locks on interest rates, paid for by builders, protecting buyers against future increases.
If you're in the market for a new construction property and you see an incentive that appeals to you, take advantage because they are often fleeting.
