8/29/2033: Why New Homes are Still Selling with 7+% Mortgage Rates
Builders are giving incentives like crazy
Have you ever wondered why new homes are still selling with the crazy high 7+% mortgage rates? I have. It turns out builders have been subsidizing home buyers with their mortgages. Instead of paying 7% on their mortgage, buyers can get the mortgage rates at 6% or less. According to a market watch report, most large home builders are allocating 4%-6% of the home-sale proceeds toward buying down the mortgage rate for their buyers. These mortgage buydowns can be permanent or temporary. Mortgage products like the 3-2-1 temporary rate buydown, for example, offer lower rates in the first few years of repayment, after which they permanently reset to the higher market rate. Namely, the rate is 4% for the first year, 5% for the second year, 6% of the third year and 7% afterwards.
As a result of the new home mortgage incentive, we are seeing new home sales trends up while existing home sales trends down as shown above. But it is unclear if the builders can continue to offer similar incentives if the 10-year Treasury yield remains high. The monthly payment for a $500K mortgage originated a year ago is $2,387 when the rate was 4% a year ago but will now be $3,327 if the mortgage originated today at 7%. Since house prices barely changed YoY, that’s a 40% increase in mortgage payment. I imagine not many people could afford buying their first home or upgrading to a bigger and better home with this dramatic increase in costs. Housing affordability is one of the serious consequences of ZIRP/QE, which drove up the house prices to bubbly levels and made the American dream of home ownership unattainable for many.