Finding Affordable Housing in Today’s Market

As many Americans face high home prices and mortgage rates, there are still some affordable housing options that might be overlooked. In certain regions, builders have a considerable inventory, are flexible on pricing, and can provide lower mortgage rates.

Newly built homes come in various forms:

• Recently completed homes that are ready for immediate move-in.

• Houses under construction where buyers can choose from several designs and have options for upgrades.

• Custom homes tailored to the buyer’s specifications.

Regardless of your choice, you’ll be the first owner in a home that has never been occupied.

“New construction is crucial in broadening housing options and addressing affordability issues,” says Daniel Hale, chief economist at Realtor.com. He adds that builders are adapting to market conditions and the financial challenges buyers face, such as high monthly payments and hefty down payments. This creates a unique opportunity to buy a new home in the current climate.

However, Hale also points out that the advantages of new construction can vary by region. In the South and West, there tend to be more incentives and better pricing for new homes, while in the Northeast and Midwest, newly built houses may be priced higher and have limited availability.

Interestingly, the affordability of new construction is improving. Research indicates that the price gap between new and existing homes is decreasing, primarily due to falling prices of new homes.

Builders are often more eager to sell than existing homeowners, pricing their offerings competitively to move their limited inventory.

According to Zonda, a data analysis firm, about 60% of new housing communities offered incentives for new home construction, and 78% provided them for homes ready for immediate occupancy. It’s worth noting that the number of builders offering incentives could be even higher, as only known incentives are reported.

The most common incentive from builders involves mortgage rate deals, which might include a mortgage rate buydown or a below-market adjustable rate mortgage. But how do builders manage to offer these lower rates? Often, they negotiate lump-sum interest rate loan packages with partner mortgage lenders, securing favorable financing terms for entire projects instead of pricing each loan separately.

A recent analysis by Realtor.com showed that new home buyers could see nearly a 1% reduction in 30-year mortgage rates compared to those buying existing homes. There might be a 0.5 percentage point difference in the first two quarters of 2025, though further rate increases could occur later in the year.

Common benefits offered by builders include:

• Reduced down payment: The average down payment for new home buyers is around 15.7%, while it’s 17.8% for existing home buyers. Incentives for new homes have significantly lowered these requirements.

• Price adjustments: New homes are frequently less expensive per square foot, especially in the South and West.

• Discounts on closing costs: Builders may offer a discount on closing costs, often requiring you to work with their preferred lenders.

• Upgrades: Builders might include complimentary upgrades, such as high-end finishes and appliances.

That said, not all financing deals from builders are as great as they sound. For instance, a builder in Northern California might advertise a 3.75% interest rate for the first seven years, but when fees are considered, the actual APR could be around 5.224%. While still attractive, it’s essential to know the real cost.

If you see an offer for a lower interest rate accompanied by a higher APR, it could be a sign of upfront costs or future payment adjustments.

“Buyers should compare APRs carefully to ensure they aren’t misled by just the quoted rate,” advises Brian Hurd, Senior VP at Cardinal Financial. He stresses the importance of understanding how adjustable-rate mortgages work, including how long the initial rate lasts and potential future payment increases.

An example of a builder financing incentive is a 2/1 buydown, which means:

• A 2% discount for the first year.

• A 1% discount for the second year.

• From the third year onward, the interest rate would be fixed at the market rate.

Hurd notes that while builder financing incentives can enhance affordability, they don’t solve all issues. It’s crucial to understand which aspects are temporary and which are lasting. A lower starting rate might not necessarily lead to lower long-term costs, so it’s wise to assess the loan’s performance over time, not just the initial payment.

When comparing loan offers, whether from builders or external lenders, it’s also good to know if the incentives are tied to a specific lender, how prices might change, and whether additional costs are hidden in the loan terms.

Buyers should evaluate interest rates, APR, total costs, and the duration of any incentives. Understanding how long a quoted interest rate is locked in and whether there’s flexibility if a home’s completion schedule changes is also critical. Getting a second opinion doesn’t mean stepping away from your contract; it can provide clarity.

One potential downside to builder financing is that the capital can be tight. “While builder incentives can significantly lower mortgage rates, there are trade-offs,” says Joel Varner, an economist at Realtor.com. He points out that paying close to the list price with a smaller down payment increases the risk of being underwater if home values drop.

Additionally, some of the perks builders offer may be funded by increasing the home’s listed price. Seeking a second opinion from an independent lender can help clarify and ensure you’re getting a fair deal.

• The down payment can possibly be lowered.

• Lower mortgage interest rates may be feasible.

• There could be reductions in closing costs.

• Warranties for major systems may be included.

• Less initial need for repairs and maintenance.

• Energy-efficient materials could lead to lower energy bills.

• However, developments tend to be in suburbs with cheaper land, which can mean longer commutes.

• Construction delays might lead to wait times for moving in.

• New landscaping can appear sparse initially, requiring time to mature.

Finding the right home involves considering various lifestyle factors like affordability, location, amenities, and perhaps even the quality of schools for your children. If your family is growing, you’ll want to think about the size of the home. Do you prefer a spacious neighborhood with parks, or do you favor an urban setting without clear property boundaries? Both new and existing homes can meet your needs.

Each option has its pros and cons. Ultimately, the key might lie more in the specific amenities you value and what you can afford rather than merely the age of the home.

A thorough home inspection can reveal critical issues such as drainage problems, insulation deficits, unreliable electrical systems, foundation issues, and other construction flaws. It’s a crucial part of the homebuying process, one that shouldn’t be overlooked.