The Short Answer
The real estate market in summer 2024 has been sluggish, with higher interest rates impacting both prospective home buyers and construction costs. Carl Harris of the National Association of Home Builders points out that builders are using various incentives to attract buyers for the nearly 350,000 new homes built in early 2024.
According to Zonda’s New Home Market Update, 56% of new construction projects offered incentives in January 2024. Common incentives include price reductions, closing cost credits, mortgage rate buy downs, builder warranties, upgraded features, and smaller homes to make prices more accessible.
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List of Common Home Builder Incentives In 2024
Summer is typically a bustling time for the real estate market, however it’s been more sluggish than usual in 2024. Carl Harris, chairman of the National Association of Home Builders highlights this by saying, “Higher interest rates are increasing the cost of housing for prospective home buyers and raising the development and construction cost for builders of homes and apartments.” In an effort to continue attracting interest to new construction homes, builders have been using a number of incentives this year.
From reductions to home prices to mortgage rate buy-downs, home builders are attempting to sell the nearly 350,000 new homes that were built in the first quarter of 2024 using a variety of new home builder incentives. In fact, Zonda’s latest New Home Market Update shows that 56% of new-home communities offered incentives in January 2024.
Incentive 1: Price Reductions and Discounts
Making home purchases more affordable is an easy way to attract more buyers. As such, home builders are offering direct price cuts in the form of limited-time discounts or special pricing on certain models or lots. According to National Association of Home Builders/Wells Fargo Housing Market Index, 22% of builders cut prices in April, which created an average reduction of 6% across the board.
Incentive 2: Closing Cost Credits
Closing costs usually make up anywhere between 3% and 6% of the home purchase price. This can become a barrier for buyers who have a tight financial situation. Therefore new home builder incentives include covering a portion or all of the closing costs of a deal. This can significantly reduce the upfront cash needed from buyers, making the purchase process smoother and ultimately reducing the barrier for buyers.
Incentive 3: Mortgage Rate Buy Downs
Due to the fact that affordability is a significant deterrent at the moment, home builders are offering to temporarily lower the buyer’s mortgage interest rate, or other financing perks that are attractive to buyers, particularly in a high interest rate environment. So, mortgage rate buy downs have become a huge perk for buyers, or another perk that builders often use is a low down payment requirement.
Incentive 4: Builder Warranty
Long-term financial protection is also an attractive incentive for buyers, so builders are offering long warranties that help buyers feel more comfortable with purchasing a home. Buyers can have peace of mind that any potential issues will be covered for a longer period.
Incentive 5: Upgraded Features and Customization
Builders may include premium appliances, high-end finishes, or additional customization options at no extra cost to the buyer. Building material costs are decreasing slowly, which means that builders can create a win-win opportunity for buyers by offering improved fixtures and upgraded appliances. This can be a major drawcard for buyers to purchase a new home, instead of an existing home.
Incentive 6: Smaller Homes
According to Gregg Logan, a housing analyst and managing director at RCLCO Real Estate Consulting, “Although home prices and mortgage rates remain high, prices have been rising more slowly, and home builders have been introducing a broader mix of smaller homes in order to bring prices within reach of more home buyers,”. Logan anticipates that mortgage rates will decline in the second half of 2024, and this decline of mortgages rates could lead to more sales of new homes.
Why Do Builders Offer Incentives?
Housing affordability is still the top challenge for prospective home buyers, which means that incentives are necessary to sweeten the deal for buyers. Incentives that address affordability (price reductions, buy-downs etc) are aimed at entry level buyers who are in a lower income bracket, while buyers that are at a higher level are more attracted to flexible financing options.
The Best Type Of Incentives To Pursue
The best type of incentives to pursue will vary for each buyer, it depends on your financial situation, your goals, the long-term impact of the incentives and the current market. Here are a few examples:
- If you need lower monthly repayments then a mortgage buy-down is a good incentive for you.
- However, if your aim is to minimize upfront costs rather, then a closing cost credit may be in your best interests.
- Home warranty extensions provide peace of mind by covering potential repair costs.
- Or for those who want a home that is move-in ready, then discounted appliances and furnishings would be your best bet.
Red Flags To Be Aware Of Before Agreeing To Incentives
When you’re considering home builder incentives, it’s important to be aware of potential red flags that could indicate unfavorable conditions or hidden costs. Here are a few signs to look out for:
- Offers that seem too good to be true
Extremely generous incentives might indicate that the builder is trying to get rid of properties that have issues or are in less desirable locations. Make sure that the incentives don’t come with strings attached, these could cost you more in the long run.
- Hidden fees or costs
Double check the deal’s terms and conditions to make sure that there are no hidden costs or fees. Incentives can come with hidden costs such as the buyer having to pay for certain upgrades after a certain period of time.
- Great financing terms
Incentives that involve great financing terms should be checked thoroughly, because these can sometimes result in higher long-term costs, for example interest rate changes. It’s a good idea to compare a builder’s financing options with independent lenders to make sure that you’re getting a good deal, and run the long-term numbers to make sure it won’t end up costing you more.
- Warranties that have limitations
Home builders who offer a builder’s warranty may present an enticing offer, but it’s important to check the warranty which could have exclusions and limitations which reduce their value. Check the maintenance requirements associated with the warranty, there may be some maintenance requirements that could void the warranty.
- Quality of construction
Incentives should not come at the expense of construction quality. Check reviews and inspect homes to ensure the builder maintains high standards. Visit other homes built by the same builder to assess the overall quality and craftsmanship.
Final Thoughts
In 2024, housing affordability remains a top challenge, making new construction incentives crucial for attracting buyers. Different incentives cater to various needs: mortgage buy downs for lower monthly payments, closing cost credits for reducing upfront costs, and extended warranties for long-term protection on new construction projects.
However, it’s essential to be cautious of red flags such as offers that seem too good to be true, hidden fees, or compromises on construction quality. By thoroughly evaluating these incentives, buyers can make informed decisions that best suit their financial situation and goals.
