As the shock of high interest rates has dramatically slowed the real estate market for the last year and a half, homebuilders have had to get creative to make homes more affordable. Tactics like paying for closing costs or offering designer upgrades have helped to spark new business during the downturn; however, it’s mortgage rate buydowns that have proven to be most successful for the nation’s largest homebuilder.
D.R. Horton, which ranks #120 on the Fortune 500 list, has seen so much demand for mortgage rate buydowns that they’re still planning to offer them for the foreseeable future, even after rates fall.
As the nation’s largest publicly traded homebuilder, D.R. Horton has been able to maintain a competitive edge throughout a challenging real estate market by offering mortgage rate buydowns over the last two years. These deals vary drastically by market and location; however, they generally consist of one point below market on a 30-year fixed-rate mortgage. Many of these offers are pushed through D.R. Horton’s own mortgage company DHI Mortgage.
“I believe on a go-forward basis, staying competitive in not only the new home market but especially in the resale market for us, the ability to have a lower monthly payment for the same cost of a home is advantageous,” CEO Paul Romanowski said on the earnings call. “We have no plan in the near term to stop utilizing it even if we see rates shift down.”
D.R. Horton’s stock fell from $157 to $143 (-9%) following the earnings release due to lower-than-expected margins in its fiscal Q1 2024, which ended December 31. The margins dropped 220 basis points quarter over quarter. The increase in mortgage rate buydowns cut into profitability and resulted in 100 basis points of the decline; however, aggressively pushing these offers was necessary to drive production while rates hovered above 8% in the remaining months of the year.
Additionally, D.R. Horton reported more and more single-family homebuyers prefer mortgage rate buydowns compared to other incentives — and that trend is continuing to grow. 80% of all buyers last quarter chose the buydown, which was up 14% quarter over quarter and 80% of the mortgages offered by DHI Mortgage were done with buydowns during the same time period.
Homebuilders have been able to offer competitive buydowns because the pandemic-era’s low interest rates sparked so much demand that companies have maintained significantly higher profit margins these last few years. The question will be whether they can continue to do so as weakening demand will continue to challenge profitability.
While Wall Street’s reaction to the homebuilding giant’s decreasing margins was negative, it’s important to keep in mind that D.R. Horton and many other publicly traded homebuilders continue to maintain margins higher than pre-pandemic levels, which offers some room to continue to provide incentives for the long-term.
Currently, D.R. Horton’s buydowns vary by market. For example, in a community east of Atlanta, they’re currently offering a “1/1 buydown program” on a 30-year mortgage, which consists of a 3.99% rate for 1 to 2 years and a 4.99% rate for the remaining 28 years on select homes that go under contract before 2/29/24. Meanwhile, in Columbus, they’re offering a 5.25% fixed rate conventional mortgage on specific listings that go under contract prior to 2/29/2024.
The strategy to continue popular incentives long-term may lead to thinner margins, but it could spark more growth. It’s also good news for homebuyers who have been facing significant affordability challenges for the last three years.
