Looking for a 4% mortgage? Here's where home buyers can find one.

By Aarthi Swaminathan

Incentives like mortgage buydowns and price cuts on homes are out there.

Aspiring homeowners put off by current mortgage rates can still find newly built homes that come with a 4% mortgage rate, one real-estate expert says.

With the 30-year mortgage averaging 7.76% as of Nov. 2, many home buyers find that borrowing costs -- and high home prices -- make it too expensive to purchase a home. To buy a median-priced $400,000 home, a homeowner would need to make at least $120,000 to afford the monthly payments.

When mortgage rates were at 6%, buyers needed to make a little over $100,000 to cover their housing costs. Experts generally advise that buyers spend no more than 30% of their income on housing.

With so many buyers priced out of the market, demand has fallen and existing-home sales have cratered. The pace of home sales for 2023 is expected to be the lowest since 2008, during the Great Recession.

Yet sales of newly built homes have "defied gravity." In September, sales of new homes were up 34% compared with last year.

Why the contrast? The increase is partly due to home builders offering two specific kinds of sales incentives to sweeten the deal for buyers: Mortgage rate buydowns, and price cuts.

Home builders are paying points for home shoppers to reduce their mortgage rate and their monthly payments to make buying more affordable.

"Paying points," or mortgage rate buydowns, refer to home builders paying a sum of money up front to lower the mortgage rate that a buyer will get for their loan. The rate decrease is sometimes permanent, but it can also be temporary, meaning that the rate may rise to the prevailing rate after a period of time.

"We're seeing them today in the high 4s," said John Burns, CEO of John Burns Real Estate Consulting, referring to the lowest rate he's seen offered by a home builder, in a recent episode of Barron's Live.

Consider Lennar's (LEN) effort to drum up sales: In Austin, Texas, in early November, the builder was offering a rate as low as 4.99% on a 30-year Federal Housing Administration home loan for buyers who get financing from the builder's affiliated mortgage company, Lennar Mortgage. In Orlando, Fla., the company was offering an adjustable-rate mortgage with a rate as low as 3.99% in the first year. After that, the mortgage adjusts to the prevailing rate, which could be as high as over 7%.

Pulte Homes (PHM), another publicly-traded home builder, is offering 30-year mortgage rates at 4.875% for some of its communities.

Lennar and Pulte did not respond immediately to requests for comment.

Builders are paying for the difference between the prevailing rate and the rate they are offering, Burns said, yet it's not necessarily at a huge cost for the big players. While the buydowns are "straight out of their profit margins," Burns said, "they bought the land, most of it, three or four years ago, when they were anticipating selling the home for say $500,000. And now it's worth $700,000. So they have a lot of profit built up and they're giving some of it back to the home buyer."

Builders are also dropping asking prices on homes in some cases to boost demand. In September, the price of a median-priced newly built home fell to $413,000 from $433,000, as seen in the chart below.

Burns said that he heard more chatter about price cuts in a recent survey of hundreds of home builders. "And this was the first month in a long time where more builders told us we're actually dropping prices too," Burns said, and that's on top of rate buydowns.

But price cuts can come at a cost for the home buyer, he added. Builders are bringing costs down by constructing smaller homes, Burns said.

In an April report, Burns's company surveyed 290 residential architects, designers and design-oriented builders and learned exactly how much homes are shrinking: A third of detached homes now being planned and built are expected to be under 2,000 square feet, and 70% will be under 2,500 square feet, the company found.

The median size of a typical single-family home sold in 2022 was 2,383 square feet, according to the U.S. Census Bureau.

-Aarthi Swaminathan

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11-04-23 0750ET

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