The same week in mid-August that the Freddie Mac conforming mortgage rate broke 7.0%, our survey team visited 13 home builders, three land brokers, and a regional developer in Jacksonville and Orlando to supplement our survey knowledge, regular phone calls, and hundreds of monthly community visits.
We confirmed that the frequent use of mortgage rate incentives paired with inventory homes available for quick move-ins continues to drive stronger new home sales than typical for July and early August. The same potent combination is helping builders across the country.
Mortgage rate buydowns continue to work, with varying strategies by builder.
- Permanent buydown: Buying the 30-year fixed mortgage rate down permanently to 5.25% to 5.75% is making a positive difference in allowing home buyers to qualify for the home purchase.
- Sub 5%: Builders will even buy the current rate down to 4.75% to 4.99% for inventory homes they want to sell quickly.
- Prepaying for even lower rates: Using a forward commitment, a builder’s mortgage company can originate FHA (Federal Housing Administration) or conforming mortgages at a below-market rate. Often, these buckets of money must be used within 60–90 days, so they work best when builders have nearly completed inventory.
- Temporary buydowns: A couple of Florida builders are using 2-1 temporary rate buydowns (a mortgage rate that is -2% lower in year one and -1% lower in year two) as part of a flex-cash program, allowing buyers to spend the dollars on closing costs, design center options, or a longer rate buydown. A move-up builder sees buyers accepting current elevated rates and planning to refinance when rates drop. This article explains temporary rate buydowns.
- Managing cancelation risk: One builder requires a 20% down payment from buyers receiving a 30-year rate buydown.
- Good to be big: Smaller production builders may struggle to compete for sales due to limited access or high costs of capital that curb their ability to provide inventory homes and rate buydowns.
- No problems reported: Builders did not express concerns regarding their margins, even though 30-year rate buydowns are expensive. We have not heard of appraisal issues that could potentially stem from the heavy incentives offered but are monitoring for potential risk.
Jacksonville and Orlando are more rate sensitive than other Florida markets that attract a higher percentage of retirees who pay all cash and don’t need rate buydowns.
Florida home demand and supply are almost back in balance.
Florida enjoys a more balanced housing market than most other regions. Just 63% of Florida resale agents say that buyers outnumber sellers—one of the lowest percentages in the country, as shown in the following graph.
However, many Florida builders are competing effectively with the resale market by offering inventory homes available for a quick move-in paired with the rate buydowns.
Many large builders maintain an advantage by offering their own homeowners insurance through related companies.
- National builders can create a large and growing pool of homeowners insured by their related company, spreading risk across diverse markets and providing guaranteed issuance to support new-home closings.
- Builders have not been marketing their insurance programs to prospects, and we think they should promote this competitive advantage to boost buyer confidence. We expect more builders to consider forming ventures with insurance providers
- Most property insurers halt issuing new policies when a hurricane is approaching, impacting much of the Gulf and South Atlantic coasts. The builders’ insurance companies will issue policies to advance the closing regardless, though many buyers prefer to hold off closing so that the builder will be responsible for any storm damage.
Additional takeaways
- Orlando and Jacksonville builders are not experiencing a labor shortage resulting from Florida’s new immigration law, Senate Bill 1718, enacted on July 1.
- Builders mentioned their continued willingness to engage in build-to-rent (BTR) agreements. However, BTR firms face challenges from rigorous underwriting criteria and elevated capital expenses, so few can execute deals.
Our large Florida and Southeast consulting team is ready to address your housing and investment-related questions! Contact Lesley Deutch for more information.
