INSIGHT

Top 5 Incentives in a Softening Housing Market

Interior Logic Group Design Center Options

For anyone who’s a veteran of the homebuilding industry, market cycles are nothing new, and when the housing market softens, that’s when the right mix of incentives can move new construction homes even when interest rates are rising and affordability is being squeezed.

Fortunately, there are several types of incentives builders can offer which are either unavailable or less common in the resale market, such as design center allowances, landscaping options and ‘buying down’ the mortgage interest rate for qualified buyers. 

Over the last 30-plus years working as real estate marketing consultants with some of the industry’s top builders, the Advantage Group has seen firsthand which incentives move inventory the fastest.

So what are the Top 5 best incentives in today’s market?

1. More options for affordable mortgage financing

The first top incentive is more affordable mortgage financing, which is popular in both good times and bad.

These days, the most popular program to make mortgage payments affordable is the permanent fixed-rate buydown. 

Depending on the mortgage product offered, this allows the seller to pay up to 3 points to lower the mortgage rate by as much as one percent or more throughout the life of the loan.  Even better, buyers get to qualify based on the lower payment amount, allowing them to spend more on a new home.

Another option to make payments more affordable is the temporary 2-1 buydown, in which buyers can take advantage of lower mortgage rates in the initial years of their loan.  As of August, this would offer starting rates below 4 percent for the first year and below 5 percent for the second.

Although buyers would still need to qualify for the payment at the full rate starting in the third year, that gives them two years to re-allocate those extra funds to upgrades, landscaping and furniture.

A third option to lower the mortgage payment is with an adjustable-rate mortgage (ARM),which are much more conservative than some of the ARM options in years past.  Today’s ARMs have much lower annual adjustments as well as stricter lifetime caps.

For example, a buyer starting with a 4.5 percent interest rate would not see a rate higher than 8.5 percent during the life of the loan.  In addition, mortgage investors also have a vested interest in avoiding ARM rates which rise too high, as that will only encourage buyers to refinance into more stable options.

2. Get creative with financing options

The second top incentive is also related to financing, in which the builder offers to pay closing costs, if the buyers agree to use the builder’s preferred lender.

But because buyers can easily compare costs for these services now more than ever, builders should ensure these preferred quotes are competitive.

In addition, conventional loans backed by FannieMae and FreddieMac also have limits on seller contributions, which range from 3 percent of the sales price for buyers putting down less than 10 percent to 9 percent for those putting down 25 percent or more.

3. Offer a generous allowance at the design center

The third top incentive is a generous allowance for upgrades at the design center.  In this case, however, because most builders enjoy volume pricing when buying wholesale from suppliers, they can offer substantial savings in the form of incentives and potentially still recapture their investment.

Still, builders must be mindful that although buyers will likely pay a premium for the convenience of having a one-stop shop for designing their new home, they’ll still be mindful of the competition.

4. Everything’s Included!

The fourth top incentive is everything included, in which appliances, washers and dryers, refrigerators, additional security features and window coverings are part of the standard spec package, making the new home more ‘move-in ready’.

5. Also upgrade outside living

The fifth top incentive is including outdoor living spaces and landscaping features or offering premium lot sizes above and beyond what is generally offered.  For landscaping, that could include an upgraded design in the front yard or installing turf or drought-resistant plants in the back.

In the past, some builders would even offer resort-like backyards with pools and spas to move their most high-priced inventory. For premium lots, that could mean a larger backyard, a corner lot or even a lot with a commanding view.

Buy the home, not the interest rate

Regardless of the incentives offered, the builder’s main job is to emphasize the value proposition with each option, with clear explanations which are easy for buyers to understand.  That’s where educating buyers to buy the home and not the interest rate is critical.  Whereas mortgages can be refinanced, poorly chosen homes must be sold.

Plus, by also focusing on the discounted or free upgrades, sales agents can help buyers reach their own dream of what a new home and lifestyle looks like much faster and easier than they would likely be able to do on their own.

Want to learn which builder incentives are working the best in today’s marketplace?  Contact our team of experienced real estate marketing consultants at the Advantage Group today.

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