Can mortgage rate buy-downs offset chill in DFW resi market?

Mortgage rate buy-downs–traditionally a last-minute negotiating tactic to close deals with tentative home buyers–are now being deployed by sellers, builders, realtors and lenders as a way to entice buyers in North Texas and elsewhere as interest rates go up and the residential market cools down.

So far, it’s working, with the typical buy-down costing 1 percent of the cost of the property for every .25 percent cut in the interest rate. That equates to 4 percent of the purchase price of a home for every full percentage point shaved off the mortgage interest rate. And that comes to around $14,000 to lower the interest rate by one point from today’s going rate on a mortgage loan for a house at Dallas-Fort Worth market’s median price of $350,000, for example.

In exchange, the buyer would lower the monthly payment by around $135.

Buy-downs aren’t new, but they’re are gaining steam in Texas and beyond with the first significant increases in interest rates in nearly a generation.

The shift from offering buy-downs from a last-minute clincher to opening gambit on home sales generally amounts to a discount on the seller side of a deal. Collin County, in the heart of the recently booming Dallas-Fort Worth metroplex, offers a clear example of the growing popularity: The market saw 272-home deals in January 2022, according to MLS data. In September, as mortgage rates climbed toward 7 percent, there were 498 buy-down deals–an 83 percent increase.
The trend is clear across Texas and the nation, said Kelly Rogers, of Houston-based lender Movement Mortgage.

“We are actually seeing this across the country. It’s not relegated to one specific market, and it’s because interest rates have gone up more in the last six months than they have at any time in our history,” Rogers said said “We are seeing that it is an overarching product that appeals to almost every buyer available.”

Rogers said that the trend stands out in Texas, where the recent housing boom was more prominent compared with most other parts of the country. A big runup in inventory means sellers now facing a chill in the market are potentially more determined than in other states. She also said development companies, especially those that are sitting on lots of inventory, are also working with lenders to offer buyer incentives as well.

Megatel Homes, a prominent developer and builder in Texas and nearby states, is advertising for “mega-low rates” in partnership with lending companies. Realtors are also prominently displaying ads on home listings for interest rate buy-down offers across the state.

“When we realized rates weren’t coming down, a lot of lenders started educating [realtors] to say ‘hey because we’re starting to see prices being reduced … let’s take that same money and apply it towards the [mortgage rate],’” said Crystal Parkinson, manager at Cardinal Financial in Dallas. “Now, those sellers are going to open up a larger pool of who qualifies for that house.”

The buy-down can be more effective in reducing the buyer’s monthly costs compared with concession on price.

Parkinson said that if a buyer qualified for a $450,000 loan with 5 percent down and an interest rate of 7.5 percent and the seller lowered the total home-buying cost by $25,000, it would likely only lower the borrower’s monthly payment by $100 or so. But if instead, that seller takes that same $25,000 and buys down the mortgage points to around 5.6%, it can save the borrower up to $500 a month in payments.

Dallas realtor Douglas Newby, who typically deals in the luxury market, said buy-downs are an effective short-term strategy to bring homes that seemed unaffordable within range for buyers when interest rates climb. But, he said, don’t mistake the tactic as a form of charity from sellers and lenders.

“Houses now cost 50-60 percent more than they did. And the higher the interest rates go, the more programs they are going to offer. But when interest rates go back down, many of those programs will go away,” Newby said. “Lenders are fine if they’re just making profit. All a buy down point is, is a seller pre-paying X amount on the loan.”

Lenders are also pushing adjustable rate mortgages with up front buy-down offers, Rogers noted. The adjustable rate allows buyers to take advantage of an even lower initial interest rate than a buy-down on a fixed mortgage. These loans can be attractive to buyers looking to only live in a home for a few years or who want to flip a house for profit when the market is peaking.

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