Builders push lenders on financial perks to entice buyers

Builders aren’t lowering prices, but they’re helping buyers to afford new-home deals.
Mike Groll /Associated Press/File 2013
Builders aren’t lowering prices, but they’re helping buyers to afford new-home deals.

Greg and Julie Corbin were shopping for a home in May when interest rates spiked, shrinking their budget. Lennar Corp. persuaded them to pay full price, anyway.

The Miami-based builder volunteered to cover their loan costs and cut half a percentage point off their interest rate if the couple used its in-house lending unit, Universal American Mortgage Co. The Corbins bought their four-bedroom home in a suburb of Tampa last month for $213,000, about 50 percent more than the area’s median price, with loan perks they estimated were worth at least $10,000.

‘‘You just can’t beat a deal like that,’’ said Greg Corbin, 40. ‘‘It made our decision easy.’’


Builders that typically throw in concessions such as kitchen upgrades are also leaning on their financing units to boost orders as rising mortgage rates sap customer buying power. Those incentives may become more widespread as housing companies seek to avoid cutting prices after the biggest sales drop in three years and a 27 percent stock decline from a May peak.

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‘‘They’re almost certainly going to have to report a drop in home sales for the quarter, and their shares have taken a pounding in the last few months because of that,’’ said Christopher Low, chief economist at FTN Financial in New York. ‘‘They have a sense of urgency because if they have to report prices fell, too, it will be a disaster.’’

The number of contracts signed to sell new homes fell 13 percent in July from June, according to the Commerce Department. The median price gained at an 8.3 percent pace from a year earlier, slower than the prior month’s 11 percent increase and less than half of April’s 18 percent jump.

This year’s biggest losers have been M/I Homes Inc., Hovnanian Enterprises Inc., and MDC Holdings Inc., which sell to first-time buyers, who have the most difficulty qualifying for home loans.

Publicly traded builders sell one in four new US homes and have more access to capital and flexibility to offer closing cost incentives than smaller competitors, said Stephen Kim, a Barclays analyst who downgraded his outlook for builders in July.


‘‘The next shoe to drop is going to be incentives,’’ Kim said.

The US median price of a new single-family home fell in the last three months to $257,200 after hitting a record high of $279,300 in April. That was up from $204,200 during the depths of the housing crisis in October 2010.

Lennar’s incentives averaged $20,200 per home in the quarter ended May 31, down by $9,600 from a year earlier. Interest rates were falling during most of that period. Allison Bober, a Lennar spokeswoman, declined to comment on recent concessions because the company is reporting third-quarter results this month.

PulteGroup, the largest builder by market value, is offering as much as $3,500 in closing cost assistance to buyers in Las Vegas; Jacksonville, Fla.; and Tigard, Ore., who finance through Pulte Mortgage LLC, according to its website. A spokesman said this isn’t a new program.

Incentives may include paying down interest rates, waiving closing costs, and prepaying mortgage insurance. Closing costs on a $225,000 mortgage could total about $5,600 depending on where the borrower lives, according to Fair Isaac Corp., a credit analytics company.


Cutting interest rates allows borrowers to qualify for bigger loans by reducing the size of their monthly payments. Assuming a 10 percent down payment, someone eligible to buy a $300,000 house at the beginning of May, when the average rate for a 30-year fixed mortgage was 3.35 percent, would have to start shopping for homes priced at about $260,000 after rates rose to 4.48 percent.

Money that isn’t spent on closing costs can go toward a bigger down payment or be shown to lenders as cash on hand to improve a buyer’s creditworthiness. When a builder prepays a mortgage-insurance policy it reduces monthly bills used to gauge a borrower’s debt load.

Homebuilders can’t offer loans with teaser rates, which became common during the housing bubble years, said Greg McBride, senior financial analyst for Usually, they must meet rules for conforming mortgages set by Fannie Mae, Freddie Mac, and Ginnie Mae. For jumbos, or loans with balances above the conforming cap, they have to adhere to the requirement set by banks that will buy the loans.

In August, some builders in California and Arizona raised buyer incentives, halted price increases, and began offering higher commissions to real estate agents, said Alex Barron, an analyst at the Housing Research Center in El Paso, Texas.

Higher mortgage rates are more likely to slow sales to first-time buyers than to people purchasing a move-up home, said Kim, the Barclays analyst.

While Toll Brothers Inc. was able to raise prices an average $18,000 in the three months through July 31, it also offered buyers the option to lock in current rates, said Don Salmon, president of TBI Mortgage Co. The locks last as long as 12 months on conforming loans. Rate locks were only 6 months on jumbo loans.

Builders shy away from discussing incentives and often don’t advertise them because it gives away their negotiating position for future sales, said Dawn Rae, a broker with Florida Buyers’ Advocate. Once buyers report they got $10,000 in concessions, other shoppers will demand it too, said Rae. Mortgage incentives create bigger savings for buyers than getting upgrades like granite countertops or landscaping, Rae said. Sometimes you can get both, she said.

‘‘It’s a good time to be negotiating with builders because they’re eager,’’ Rae said.