Mortgage rates have surged to 20-year highs of more than 7%, and are poised to rise even further. But buyers of new homes aren\u2019t necessarily feeling the pinch.<\/p>\n
Higher mortgage rates add hundreds of dollars in extra borrowing costs for an aspiring homeowner looking to purchase a home. But buyers of newly built homes are enjoying lower mortgage rates, as home builders offer lower rates.<\/p>\n
In fact, some buyers of newly built homes are getting mortgages that have a rate of less than 6%, John Burns, CEO of John Burns Real Estate Consulting, wrote on LinkedIn this week.\u00a0<\/p>\n
That\u2019s because \u201cmost large home builders are allocating 4%-6% of the home-sale proceeds toward buying down the mortgage rate, permanently, for their buyers,\u201d Burns said.<\/p>\n
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\n \u201c<\/span>\u2018Most large home builders are allocating 4%-6% of the home-sale proceeds toward buying down the mortgage rate, permanently, for their buyers.\u2019\u201d<\/span>\n <\/p>\n They can afford to do so because they have seen their profit margins rise in the last few years, Burns explained, as well as due to a drop in lumber prices, which helps lower the cost of construction.\u00a0<\/p>\n \u201cGiving back 4%-6% of the price to keep sales strong is the smart thing for them to do,\u201d Burns added.<\/p>\n That\u2019s one of the key reasons why new home sales are higher than existing-home sales. Existing-home sales are at a six-month low, as few homeowners are listing their homes. The number of single-family homes listed on the market in the month of July, as compared to same time during prior years, was at the lowest since the 1980s.<\/p>\n New home sales have only slowed down in 12% of the largest markets in the U.S., according to Burns\u2019 research.<\/p>\n Many aspiring homeowners rely on mortgages to finance their purchase of a home, and every rise and fall can add or subtract hundreds of dollars in borrowing costs. Rates also have an impact on a buyer\u2019s buying power.<\/p>\n Buydowns can be permanent or temporary. Mortgage products like the 3-2-1 temporary rate buydown, for example, offer lower rates in the first few years of repayment, after which they permanently reset to the higher market rate.<\/p>\n The 3-2-1 temporary rate buydown works like this: When a seller or builder pays some amount of money upfront to buy the rate down, that rate goes from approximately 7% \u2014 where it is today \u2014 to 4% at the start of the payment period. Then, after a year, that rate goes up to 5%; the following year 6%; and then 7%.\u00a0<\/p>\n Or a seller can offer a 2-1 buydown, which has two periods of adjustment: It begins at 5%, then 6% after a year, then 7% or market rate.<\/p>\n Generally, these rate buydowns are paid for by the home buyer, where they set aside part of their down payment, or the home seller or homebuilder can offer it as a negotiating tactic.<\/p>\n With the 30-year hovering around 7.25%, a homeowner who has a budget of $3,000 per month to spend on housing can only afford a $429,000 home today, Redfin said. If they had bought last year around the same time period, their rate would have been around 5.5% on average, and been able to buy a $500,000 home with the same budget.<\/p>\n The figures assume that the buyer is putting 20% down, using a 30-year mortgage, paying a property tax rate of 1.25%, homeowners insurance rate of 0.5%, and no homeowners association fees.<\/p>\n Builders such as D.R. Horton and Lennar have been leaning on rate buydowns to offer a lower 30-year mortgage rate for their buyers. And they\u2019ve had success thus far, based on recent updates in their earnings calls from these companies.<\/p>\n
\n \u2014 John Burns<\/span>
\n <\/small><\/p><\/div>\n<\/p><\/div>\nHow the mortgage-rate buydown works<\/strong><\/h2>\n
Rising rates reduce buying power<\/strong><\/h2>\n