Homebuilders resurrect ’80s-era playbook in response to housing market affordability pressures

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While some homebuilders have responded to spiked mortgage rates by doing straightforward price reductions or cash incentives, the preferred affordability adjustment this cycle among many prominent builders is offering mortgage rate buydowns.

Look no further than Lennar, a homebuilder ranked No. 119 on the Fortune 500, which is presently promoting a “FHA Buydown Program featuring a rate of 3.75% in Year 1” in Colorado and after that a “4.75% for the balance of the term.”

Of course, these buydowns are hardly a new concept—they’re an echo of the past. In the early ’80s, homebuilders faced affordability strains much like today, and builders turned to mortgage rate buydowns then, as they do now in 2024.

Earlier this week, Ryan Lundquist, an appraiser in Sacramento, tweeted a homebuilder ad that ran in the Sacramento Bee on August 19, 1980. The builder was advertising a 9.75% mortgage rate at a time when the 30-year fixed mortgage rate averaged 12.95%.

A builder in 1980 advertising a rate at 9.75% when the average was closer to 13%. Sounds familiar to today, right? By the way, prices started at $110K, which is laughable with 2024 eyes. Yet, many buyers stepped back from the market that year as volume down about 20%. Thoughts? pic.twitter.com/DvZrrPd3Hn

— Ryan Lundquist (@SacAppraiser) April 9, 2024

While big builders have so far absorbed the mortgage rate shock by offering affordability adjustments like mortgage buydowns, they have seen a pull back in profit margins.

But, interestingly, even as builder margins have fallen from the highs of the pandemic housing boom, most are still above pre-pandemic levels.

Click here to view an interactive version of the chart below.

For instance, this is the gross margin by calendar year quarter for D.R. Horton—America’s largest publicly traded homebuilder— according to S&P Global:

Q4 2018: 20.19%

Q4 2019: 21.49%

Q4 2020: 25.34%

Q4 2021: 28.86%

Q4 2022: 25.77%

Q4 2023: 24.41%

On Thursday, April 18, D.R. Horton will report its fiscal Q2 2024/calendar year Q1 2024 result.