- Last year’s housing market was the least affordable since the mid-1980s.
- Near-record prices and elevated mortgage rates kept many buyers out of the market.
- But leading real-estate analyst Ivy Zelman sees a massive silver lining for buyers.
Homebuyers have found a much-needed ally in this historically unaffordable housing market: homebuilders.
The housing market was flipped upside down in late 2022 as mortgage rates spiked to some of the highest levels in two decades in response to multi-decade-high inflation.
Higher borrowing costs combined with lofty property prices made buying an entry-level house last year the hardest since 1984, according to data from Zelman & Associates.
Zelman & Associates
Those challenging conditions have seemingly made it impractical or impossible for millions of potential buyers to move. In turn, home sales have dried up, which is disappointing for hopeful homeowners, frustrating for sellers looking to relocate, and a headache for builders.
Homebuyers have an unlikely hero
Fortunately, it looks like there’s a creative yet common-sense solution hiding in plain sight.
Homebuilders are increasingly bearing buyers’ burdens when it comes to borrowing costs, real-estate analyst Ivy Zelman said in a recent interview with Business Insider.
Buyers are taking advantage of special offers from builders that bring their mortgage rate down from around 7% to 4% or 5%, Zelman explained. These so-called buydowns are a huge relief for buyers and can make the difference between deciding to close a deal and continuing to rent.
Zelman estimates that buydowns are now in place on the majority of entry-level home sales.
“Buydowns have been something — a tool — that builders have used historically,” Zelman said. “So it’s not a new phenomenon. But the magnitude of it, I’d say, is probably the most they’ve ever used it.”
Builders would rather not buy down mortgage rates since doing so eats into their profit margins.
Business Insider analyzed the operating margins of five top homebuilders and found that all have fallen or flatlined since early 2022 — except for luxury homebuilder Toll Brothers. Although Toll Brothers also has buydown offers, it focuses on well-to-do buyers who may not need them. (Higher material costs likely also hurt margins, judging by how new home prices have peaked.)
Zelman & Associates
But Zelman said it’s even worse for builders to be stuck with tons of new homes they can’t sell.
“For the near term, their philosophy is that ‘it’s driving our absorptions, we’re gaining share at the expense of existing homes’ — and they’re going to keep doing it,” Zelman said.
To that point, Zelman said the CEO of a major homebuilder told her last fall at a conference her firm hosted that subsidizing mortgage rates or providing other perks, like upgraded appliances, had become “a cost of doing business.” Otherwise, there’s a chance that home sales would wilt.
“Without those incentives, they would definitely not be seeing volume growth or even hopes of any absorption,” Zelman said. “It would be a very ugly market if they hadn’t been prudent in starting to accelerate buydowns in, really, the second half of ’22.”
After years of hardship, the future looks brighter for buyers
Buydowns are a rare silver lining for buyers and a workable stop-gap solution for builders, especially if borrowing costs don’t budge anytime soon.
It’s fair to wonder whether the abundance of buydowns is merely a product of this high-rate backdrop, given how they’re correlated with lower operating margins for builders. When mortgage rates eventually fall, Zelman had thought builders would back away from these offers.
But after further review, Zelman now suspects that buydowns have long-term staying power.
“‘We are not going to get off of it,'” Zelman said she was told by the CEO of a homebuilder in reference to buydowns. “He goes, ‘Maybe the buydowns won’t be as expensive if rates come down, but if anything, it gives us a competitive advantage against the existing market.'”
That stance may be a necessary one. Existing homes offer stiff competition on the pricing front, as their median sale price of $404,400 is well under the going rate of $427,000 for new units.
However, Zelman’s firm expects new home prices to tick up by just 1% this year before a 2% jump in 2026, compared to increases of about 3% for existing homes. That relatively soft growth should help spark sales growth of 5%, in Zelman’s view.