- This Fortune 500 homebuilder says it'll keep offering mortgage rate buydowns even if interest rates fall hard
This Fortune 500 homebuilder says it'll keep offering mortgage rate buydowns even if interest rates fall hard
D.R. Horton, the nation's largest publicly traded homebuilder, which ranks No. 120 on the Fortune 500, reported earnings on Tuesday.
Today’s letter is brought to you by Arrived!
Arrived makes it easy to buy shares of rental homes, allowing anyone to earn passive income and benefit from property value appreciation. Simply select from our wide selection of high-quality rental homes and invest anywhere between $100 and $20,000 in each property.
Arrived takes care of the management & operations, so you can sit back and build wealth. Arrived is backed by world class investors including Jeff Bezos & Marc Benioff.
Last summer, D.R. Horton's CEO David Auld, who has since stepped down and moved into a board role, told me that mortgage rate buydowns not only assisted the giant homebuilder in navigating the market during the mortgage rate shock but also provided the builder with an edge over the resale market and other builders.
“To address affordability concerns in the market, we introduced increased incentives into the market and adjusted base pricing of our homes where necessary. Our most successful incentive recently has been interest rate buydowns. We are generally offering a point below market on a 30‐year fixed rate mortgage for the life of the loan,” Auld told me in June 2023.
On Tuesday’s earnings call, D.R. Horton executives made it clear that mortgage rate buydowns have been so successful that the nation's largest publicly traded homebuilder, which ranks No. 120 on the Fortune 500 and has its own in-house mortgage company, plans to keep offering buydowns even if mortgage rates fall.
“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 home is advantageous. We have no plan in the near term to stop utilizing it [mortgage rate buydowns] even if we see rates shift down,” Paul Romanowski, who became D.R. Horton’s CEO in October, said on Tuesday’s earnings call.
Following Tuesday's earnings release, D.R. Horton’s stock dropped 9%, falling from $157 to $143 per share as Wall Street reacted to D.R. Horton’s margins, which came in slightly lower than expected for its fiscal Q1 2024, covering the three-month period ending on December 31st. Earnings fell a bit more than expected due to D.R. Horton increased spending on mortgage rate buydowns in the final months of 2023 as it tried to continue selling homes in an environment where mortgage rates briefly exceeded 8.0%.
According to D.R. Horton, it not only had to increase spending on buydowns because mortgage rates hovered around 8.00% in October and November, but the builder also observed a growing preference for buydowns among single-family buyers in the most recent quarter compared to other incentives. D.R. Horton reported that around 80% of buyers in the latest quarter chose a buydown, in contrast to around 70% in the prior quarter.
While offering aggressive mortgage rate buydowns has coincided with builders' margins decreasing from the highs achieved during the Pandemic Housing Boom, it's worth noting that most publicly traded builders still maintain margins that exceed pre-pandemic levels. That includes D.R. Horton (see chart above).
What do D.R. Horton’s buydowns look like right now?
It varies a lot by market and community.
In The Enclave at Flat Rock Hills new build community just east of Atlanta, D.R. Horton is currently advertising a “1/1 buydown program,” which offers a 3.99% rate for 1 to 2 years on FHA/VA loans, followed by a 4.99% rate for the final 28 years of the 30-year mortgage. It’s for select homes that go into contract before 02/29/24.
The fine print on this Atlanta metro area buydown: “Based on an FHA 30-Year fixed rate mortgage with a sales price of $379,900, a loan amount of $373,019, up front mortgage insurance premium of 1.75%, and a monthly payment of $2,612. Total monthly payment includes principal, interest, estimated taxes, mortgage insurance, homeowners' insurance and HOA. Rate also available for VA loan programs. Funds for the temporary interest rate buydown used in this loan example will be offered as seller incentives up to $10,000 as disclosed in the sales contract. Buyer will have the option of using said incentive to pay closing costs OR to fund the temporary buydown cost of $5,315.22.”
D.R. Horton’s Piatt Preserve new build community just north of Columbus, Ohio is currently advertising a “5.25% fixed rate conventional mortgage” on certain inventory that goes into contract before 02/29/24.
The fine print on this Columbus metro area buydown: “5.0% down payment required. Based on a Conventional 30-Year fixed rate mortgage with a sales price of $384,900, and a loan amount of $365,655, and a monthly payment of $2,453. Total monthly payment includes principal, interest, estimated taxes, mortgage insurance, homeowners insurance and HOA.”
Need help finding mortgage rate buydown offers in your market? Read this ResiClub article: Builder buydowns 101: How to find new construction deals
If your company is interested in bulk ResiClub PRO memberships (i.e., premium access for your whole team), please email me at [email protected]. Reporting and research (including proprietary data in development) offered by ResiClub PRO will continue to expand. This is an opportunity to secure a grandfathered rate at a low price for years to come.
If you’re a ResiClub PRO member and having trouble accessing our premium content/analysis, or not seeing the ResiClub PRO emails, please message me at [email protected]