Homebuilders Offer Significant Incentives to Attract Homebuyers Amid High Mortgage Rates

Incentives like mortgage rate buydowns, closing cost coverage, and flexible credits help buyers overcome financial challenges

Americans planning to purchase a newly built home this spring are likely to find builders offering substantial incentives aimed at easing the financial burden. In response to stubbornly high mortgage rates and challenging market conditions, many homebuilders are rolling out attractive offers, including helping buyers lower their mortgage rates, covering closing costs, and even providing "flex dollars" that can be applied toward upgrades or additional costs. These incentives, while not new, are becoming increasingly crucial for builders who are navigating a difficult housing market.

Builders are facing a particularly tough spring season due to a combination of high mortgage rates, increased competition from existing homes, and the reality that years of rising home prices have made it increasingly difficult for many potential buyers to afford a new home. This has put additional pressure on homebuilders to offer financial assistance, especially as the housing market continues to show signs of stagnation.

According to Ali Wolf, chief economist at Zonda, homebuilders are up against a number of challenges, including more competition, fewer buyers, and escalating costs associated with selling homes. She added that builders are unlikely to scale back their incentives anytime soon, especially as buyers have come to expect these kinds of deals. “I don’t see a world where they don’t need them, unless interest rates come down, and most signs point to higher-for-longer with interest rates,” Wolf said.

For many potential homebuyers, especially first-time buyers, high mortgage rates have made homeownership even more difficult. The average rate on a 30-year mortgage has hovered around 7% since November, after climbing from just over 6% in September. While mortgage rates have eased somewhat recently, they remain significantly higher than the historic lows of the pandemic era, when they were below 3%. With the cost of borrowing remaining high, homebuilders have relied increasingly on buyer incentives to help offset these costs. Many builders have also adjusted home prices in an effort to attract buyers.

According to surveys from the National Association of Home Builders, between 60% and 64% of homebuilders have offered sales incentives since June, and between 30% and 33% have lowered their prices. These incentives helped boost new home sales in 2024, with newly built single-family homes seeing a 2.6% increase in sales last year, reaching 1.02 million units. This marked the highest level of sales since 2021, while the resale market for existing homes remained in decline.

However, while buyer incentives can drive sales, they come at a cost. Builders are finding that these incentives, including mortgage buydowns and price reductions, are cutting into their profit margins. In the fourth quarter of 2024, the average operating margin for 12 of the largest homebuilders, including D.R. Horton, PulteGroup, and Lennar, was 15.08%, down from 16.3% in the same period the previous year. Analysts have expressed concerns that builders will need to maintain, or even increase, these incentives in order to stay competitive. With a larger selection of homes available for sale—active listings were up 25% from a year earlier—builders may face even more pressure to continue offering these financial perks.

In addition to high mortgage rates, rising construction costs and concerns about the impact of trade and immigration policies under the Trump administration have created uncertainty for builders. These factors are fueling worries on Wall Street about whether homebuilders can maintain strong profit margins in 2025. Analysts at BofA Securities recently noted that order growth for homebuilders is expected to come at the expense of margins, predicting a challenging environment for builders to persist through the first half of the year.

The pressure on homebuilders is reflected in their stock performance. D.R. Horton, the nation's largest homebuilder by closings, has seen its stock fall by 7.5% this year. Lennar is down 5.6%, and NVR has dropped 10.2%. In contrast, the SPDR S&P Homebuilders ETF, which tracks a range of building products companies, has risen by 1.4%. Meanwhile, the broader S&P 500 index is up by about 4%.

Despite the challenges, it seems likely that homebuilders will continue to offer these valuable incentives as they strive to attract homebuyers amid a tough housing market and high mortgage rates.