National Housing Market Outlook

Mortgage Rate Buydowns Are Softening the Affordability Problem

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Rick Palacios Jr photo

Danielle Nguyen

Rick Palacios Jr

December 1, 2023

It is customary for many buyers to pay a fee (0.25% to 0.5% of the mortgage amount) to lock in the current mortgage rate so that they can be assured of their mortgage payment before closing. However, the trend in the last year has been to have the seller pay a significantly higher fee to lock in a below-market rate for the buyer. Home builders have been the primary home sellers choosing this option, and more resale agents are talking their clients into offering this incentive as well—a topic covered in our recent podcast with Compass’ Chief Real Estate Strategist Mark McLaughlin.

As mortgage rates soar and it gets harder for people to afford homes, rate buydowns have become an increasingly common financing tool to drive sales and demand. We’ve written extensively about rate buydowns since December 2022. (Click here and here to view past research.)

Today, a seller contributing 4% of the home proceeds at closing can reduce the borrower’s payment by 10%. For many sellers who have benefitted from far more home price appreciation than they ever imagined, achieving 96% of today’s home value still results in a huge gain—and is far better than reducing the price by 10%. For buyers, a 10% lower mortgage payment means far more to them than a 4% lower home price. This is a win-win that varies by market and might be temporary, as explained below.

To stay ahead and gain insight into mortgage rate trends, we use Optimal Blue to track purchase mortgage loan lock activity by rate (including resale and new home sales) across various markets nationwide.

National stats

Nationally, 10% of all 30-year fixed-rate purchase mortgage loan locks for resale and new homes locked in rates below 6% for the week ending on November 22 (a week when mortgage rates typically approached 7%+). 

Market comparisons

Purchase mortgage loan lock rates vary vastly by market. Let’s take a closer look at San Antonio, where a whopping 39% of all purchase mortgage loan locks (resale and new) locked in rates below 6% for the week ending on November 22. 

San Antonio stands out as a market with a unique profile, as new home sales represent 34% of all transactions in that market. This market is also dominated by major public builders such as D.R. Horton and Lennar, which are using rate buydowns and represent approximately 39% of the San Antonio new home market. Our Texas consultants have long noted that the San Antonio buyer tends to be extremely payment sensitive, which makes mortgage rate buydowns even more successful. The rate buydown is often the difference between selling and not selling the home.

During the same time frame, Houston recorded ~25% of all 30-year fixed-rate purchase mortgage loan locks (resale and new) originating below 6% mortgage rates, with 11% of mortgages locked in at 4.5%–4.99%. This comparison highlights the different dynamics in various markets, even within the same state. 

Get the Earliest, Most Comprehensive Look at Mortgage Origination Activity

Optimal Blue offers data solutions and reports that provide daily updates on rate lock activity for ~40% of residential mortgages in the US. Leverage these insights to help your institution gain real-time clarity into mortgage origination activity across products and geographies.

We track these insights across 127 markets and update our Burns Interactive Dashboard with Optimal Blue data weekly to stay on top of evolving market conditions.

Rate buydowns are a silver bullet for builders.

Rate buydowns are particularly relevant for builders looking to meet sales goals as rates remain at 7%+ (especially for builders who target first-time buyers). Home builders’ ability to offer rate buydowns also depends on their profitability, which currently tends to be much better than usual.

In our Burns Home Builder Survey (representing ~20% of all US new home sales), we asked builders how their gross profit margins compared to one year ago. The results revealed material differences by segment, with active-adult / empty-nester builders reporting about the same or mostly higher margins than one year ago. (See the chart below and insights from our builder survey.)

  • First-time buyers are purchasing with help from full-term rate buydowns, below-market-rate originations, and builders’ closing costs contributions. Many are purchasing inventory homes that can close in 30–60 days.

  • Move-up and luxury buyers are buying a mix of inventory homes (with incentives) and presales that allow them to choose the lot and floor plan as well as options and upgrades. Some prefer closing costs or dollars to spend as they wish instead of a rate buydown.

  • Empty-nester and 55+ buyer sales stay more consistent, as many are cash buyers who are less rate sensitive. Those with a home to sell worry about timing and getting their asking price. Builders may offer price reductions and closing costs.

Rate buydowns come with risks, too.

Significant rate buydowns are not likely a permanent part of the landscape. Most buyers of mortgage-backed securities seek longer-term yields, yet today’s mortgage rates probably assume that buyers will be paying off the loan pretty soon when rates fall and they refinance, which is what the bond market is forecasting. 

Also, we have been surprised that appraisal and mortgage insurance issues have not surfaced. An appraisal is designed to comfort the lender and mortgage insurer that the borrower has enough equity to sell the home and pay off the mortgage. However, some borrowers are likely willing to pay more for a house with a below-market interest rate and thus would not be able to sell the home the next day for the same price without also offering a mortgage rate buydown. We assume lenders and mortgage insurers are factoring this into their analysis these days, especially on new home purchases where forward commitments enable rate buydowns exceeding 6% of the sale proceeds, which is often the case.

As the market becomes more challenging, our Research and Consulting teams are helping clients unlock new insights to better navigate the current environment. Our Research team helps for-sale, for-rent, and building products executives and investors cost-effectively stay on top of quickly changing market conditions, and our consulting team applies this knowledge to specific property and strategy decisions.

Optimal Blue is the market leader in mortgage secondary marketing technology.

The company facilitates transactions among mortgage market participants through its Marketplace Platform, actionable data, and technology vendor connections. The platform supports a range of functions for originators and investors to automate and optimize core processes related to product, pricing, and eligibility, hedge analytics, MSR valuation, loan trading, social media compliance, and counterparty oversight. The company’s data services provide granular insights on mortgage pricing and trading in real time, as well as competitive insight for originators and investors to benchmark their pricing, volumes, and more.

The company’s premier product, pricing and eligibility engine – the Optimal Blue PPE – is used by over 60% of the top 500 mortgage lenders in the U.S. For more information on Optimal Blue’s end-to-end secondary marketing automation, visit OptimalBlue.com. 

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About The Author

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Danielle Nguyen
Vice President of Research
Danielle manages, implements, and analyzes the housing market with a specific focus on for-sale and for-rent research. She is a research content creator who produces high-quality, insightful, and forward-looking housing research and a trusted resource (connector) for clients and those interested in JBREC’s research.
Rick Palacios Jr photo
Rick Palacios Jr
Managing Principal, Director of Research
Rick oversees and guides JBREC’s research platform while coaching his team daily.

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