Developers, brokers wield mortgage buydowns to cut through high rates

With the residential market plagued by stagnant sales and sparse inventory, New York City developers and brokers are scouring their toolboxes for incentives to shake off the slump.

The latest to take hold is mortgage rate buydowns, a perk that lowers buyers’ monthly costs. Instead of knocking a few zeros off the sale price or including a design credit, developers and sellers offer to pay a percentage of the buyer’s mortgage interest rate for a period of time. 

The trend has been more prevalent in other markets, where buyers are more likely to rely on financing. But the perk is still spreading in New York, where new development sales are lagging behind pre-pandemic levels and contract signings only just started to increase year-over-year in October. 

“At the end of the day, whether you offer 12 months of free common charges or a buydown, it might be the same amount of money,” Serhant broker Kayla Lee said. “But to a buyer who’s worried about rates, [a buydown] serves to answer their concern.”

Mortgage rate buydowns gained a foothold in the city after Extell began marketing the perk late last year at Brooklyn Point in Downtown Brooklyn and One Manhattan Square in the Lower East Side. 

Under the offer, the sponsor would buy down mortgage rates by 2 percentage points for three years.

At the time, Nest Seekers’ chief economist Erin Sykes called the move a “bullish strategy” meant to “continue momentum and actually be more aggressive in a time where people are starting to be fearful.”

In March 2022, the Federal Reserve began hiking interest rates to temper inflation, sending mortgage rates skyrocketing and chilling the then-booming housing market. Sales plunged as wary buyers hesitated and would-be sellers clung to homes purchased or refinanced during an unprecedented period of low interest rates.

The Fed stopped raising interest rates in November, but as mortgage rates hover around 8 percent many potential buyers remain shell-shocked. 

“Unfortunately right now, this kind of painful drumbeat of excessive news around high interest rates sometimes clouds long-term perspective,” Compass’ Leonard Steinberg said. 

Mortgage rate buydowns help to offset the “emotional stress” brought on by current economic conditions, he added.

“You’re helping the consumer navigate what is probably a temporary period,” said Steinberg, who’s heading sales at No. 33 Park Row in Lower Manhattan. 

The 30-unit condominium across the street from City Hall is offering to buy down buyers’ mortgage interest rates by 2 percentage points for two years. 

The perk is a “bridge to cross to the next phase of the market,” Steinberg said. 

That might arrive sooner rather than later, which could reduce the popularity of buydowns as a sales tactic. Lee noted that several lenders she works with have said they expect rates to start easing in the spring.

But others believe the incentive is here for the foreseeable future. Even if mortgage rates come down, they’ll likely not reach the historically low levels achieved during the pandemic, The Agency’s Mike Fabbri said. 

“Even when rates get to 5 percent, [buydowns are] still going to be an attractive proposition,” Fabbri said. “They’ll continue to be used in negotiations unless rates drop to a level where it just doesn’t move the needle as much.”

While the rise of buydowns in the city may have originated with new development, Fabbri said he’s been advising some resale sellers to offer the incentive. While sellers in other markets have already been using the perk to close deals, Fabbri said it’s been trickier in New York, where co-ops are common and boards restrict flexibility in negotiating terms.

“With new development, you’re able to play with a lot of concessions in order to make a deal happen versus resale,” Fabbri said. “Especially in co-ops, there’s really only a few things you can throw into the negotiation to help bridge the gap.”

At Extell projects leading the charge on buydowns, the developer’s sales and marketing team considers the incentive a success. While Brooklyn Point has stopped offering the perk, the team at One Manhattan Square is in talks to continue it into the new year, according to the building’s sales director, Cat Liu.

“For us, [buydowns have] been so successful, and it’s still very topical,” Liu said. “Why change something that’s not broken?”