Across social media sites like Facebook, real estate professionals and homebuilders have been advertising first-year mortgage rates as low as 0.99% for new homes in cities in Texas and Florida.
Large residential construction companies like Lennar and D.R. Horton are increasingly offering swaths of mortgage buydowns and rate incentives through their own lending arms. As of December, 67% of builders were using incentives to drive sales – the highest percentage in the post-Covid period, according to the National Association of Homebuilders.
While these incentives can seem like a way to lower the cost of buying a home, they can artificially drive up new home prices, especially in places where new build communities are concentrated. If the homeowner decides to sell too soon after buying, the remaining principal on the home loan can be more than the market value, leading to a loss for the seller.
According to data from mortgage technology engineer John Comiskey, around 20.8% of most Federal Housing Administration mortgages originated by D.R. Horton’s lending arm from 2022 to 2024 are underwater. For Lennar, that percent is around 30.7%.
FHA underwater loans heat map – November, via John Comiskey
“From the buyer’s perspective, you get a lower payment, but they’re also overpaying for the house,” said Comiskey. “Is that to the buyer’s detriment? It depends.” If a buyer needs to relocate in the first few years after purchasing their home and has to sell, they might have to do so at a loss.
Some of the most attractive incentives are called a “3-2-1 buydown program.” The plan offers a starting rate of 0.99% for the first year with a percentage point increase through the third, after which a 3.99% fixed rate sets in. Some buydowns can run over a shorter period of time or bypass directly to a lower fixed rate for the life of the mortgage.
D.R. Horton advertisement from November
D.R. Horton’s in-house mortgage company, DHI Mortgage Company, LTD., was one of the top 10 mortgage lenders of 2024 with a total of over $24 billion in loans across the country. Dallas, Houston, Phoenix, San Antonio and Tampa, Fla. were at the top of DHI Mortgage originations where rates in these cities averaged from 4.91% to 5.74%. That same year, the national rate was around 6.9%.
As glamorous as they may sound, it’s not always clear to buyers how builders are affording these incentives.
“They’re heading up the amount of interest that would be paid and just wrapping it in a lump sum, so it looks nice and sexy on the front,” said Sal Zagami, construction lending vice president of Guerilla Home Loans in Dallas.
From August to November, it’s estimated that incentives accounted for 7.6% of builders’ national sales, nearly double the three-month average from two years prior. In Texas and Florida, these percentages reached 9.9% and 8.5%, respectively, according to data from John Burns Research.
“You’ll never see it on a line item anywhere,” said Zagami, who prefers to work mainly with one-time close constructions and custom builds, though he interacts with big public builders from time to time.
As incentives drive up new housing costs, home sale prices in these same states lag. Since the start of 2022, following the post-pandemic real estate boom, median home sale prices in Texas and Florida have risen by 15% and 20.5%, respectively, whereas national prices rose by 22.5%.
For comparison, in New York, where existing homes dominate inventory, home sale prices have surged 32%. In September alone, 12 of the 15 cities with the lowest annual home price growth rate in the country were in either Texas or Florida.
New builds are often clustered in new neighborhood developments. Comiskey says this fosters a “concentration effect,” where new overvalued homes caused by buydowns compete with ones that are resold shortly after construction, creating somewhat of a bubble.
Private sellers who put their recently built homes back on the market within a few years after purchase can only compete with a large builder’s brand-new homes and buydowns by lowering the overall cost of their home, since they can’t offer incentives of their own, Comiskey explains.
“Eventually they’ll have to lower the price to whatever the value actually is,” he added.
As the possibility of further Federal Reserve rate cuts in 2026 looms, buyers could also face issues refinancing their loan should mortgage rates drop below their fixed incentive rate.
Sometimes a builder’s mortgage company won’t apply existing escrow funds to a refinance unless they homeowner refinances with them, otherwise the homeowner would have to wait for an escrow refund check to come in the mail.
“It can discourage a consumer from shopping and comparing to know their closing will only be paid with that one lender,” said Zagami. “Which also means it’s possible for that original lender to get away with a higher mark up on the refinance.”