Shifting Demand: New Homes vs. Resale
There’s a new phenomenon in the home business that’s been shifting demand from resale homes to new homes over the last year. The drop in demand for homes coincided with spikes in interest rates. While pricing played a role, interest rates were a significant factor. Buyers were willing to accept higher prices if they could secure lower interest rates. Now, new builders are implementing “buy-downs” on mortgages. This tactic adjusts the interest rate downward for a specified period, redirecting demand toward new homes.
Effect on Market Dynamics
The buy-down strategy benefits both buyers and builders. It encourages buyers to opt for new homes without affecting comparable sales (comps). Comps are crucial in determining a development’s pricing. Lower comps can make it challenging to justify higher prices to lenders. By offering mortgage buy-downs, builders maintain stability in their pricing strategies.
Financial Dynamics and Buyer Attraction
A mortgage buy-down offers more financial advantages than price reductions. While slashing prices might have a limited impact on monthly payments, lowering the interest rate significantly reduces the payment. This strategy entices buyers back into the market, leveraging financial benefits.
Seller pressures and market response
Existing homeowners face reduced pressure to sell. With the market shift, sellers are less compelled to lower prices. Many homeowners have substantial equity and low mortgage rates, providing little incentive to sell. Even in cases of relocation or financial distress, the potential for renting out properties at a profit or exploring alternative options like Airbnb minimizes the urgency to sell.
Builders’ Strategy for Market Share
New home builders need sales to sustain their business. The buy-down approach to mortgage rates is a strategic move to reignite demand for new constructions. With this tactic, builders aim to keep their construction projects active and entice buyers into purchasing new homes amidst the shifting market landscape.