When mortgage rates began climbing a couple of years ago, many Phoenix homebuyers found themselves on the sidelines. But homebuilders stepped up, offering rate buy-down incentives to help buyers secure more manageable mortgages—a strategy that’s cost the industry millions but has kept the market moving.
With mortgage rates still hovering around 7%, these incentives are proving essential to sustaining home sales. Though many builders are eager to phase them out, the current market conditions suggest the programs will continue into 2025.
Builders Tackle Rising Rates with Incentives
Keith Burton, a Realtor with the Rider Elite Team at Keller Williams, explains how buy-downs are structured. One popular option is a 3/2/1 buy-down mortgage, where the interest rate starts at just 1.99% in the first year, climbs to 2.99% in the second year, and settles at 3.99% in the third year. From the fourth year onward, buyers pay the full rate, which might be locked as low as 4.99% for a 30-year fixed mortgage.
Some builders are even offering 30-year fixed rates at 3.99%, a move that’s easing the financial burden for Phoenix buyers.
The Cost of Keeping Homes Affordable
These incentives aren’t cheap. Don Barrineau, Phoenix division president for Mattamy Homes, estimates that builders spend between $40,000 and $60,000 on a $500,000 home to lower mortgage rates for buyers. That cost comes directly from the builder’s gross margin.
“It’s a huge expense,” Barrineau says. “I can’t just increase home prices to offset it—buyers wouldn’t go for it.“
Jeff Gunderson, senior VP of land operations for Lennar Corp., agrees, calling the spending “mind-blowing.” Builders like him are reluctantly paying these costs to remain competitive.
A Historical Perspective
Rate buy-down incentives aren’t new. Builders used similar strategies during the 1980s when mortgage rates exceeded 11%. But today’s approach is unprecedented in its scale. Barrineau notes, “This is the most prolific use of discount points I’ve seen in my career.”
The current landscape leaves little choice. Without these offers, builders risk losing significant market share.
Margin Squeeze for Builders
Michael Fraley, chief growth officer at Oakwood Homes, highlights the stark contrast between today’s market and a typical one. “In a normal market, incentives might cost $5,000 to $10,000 and include perks like appliances or help with closing costs,” he says. “Now, we’re seeing incentives that are four times higher.”
Heather Cammiso, Arizona division president for Landsea Homes, confirms the widespread impact, saying that about 75% of their sales rely on rate buy-downs. For Oakwood Homes, the figure is closer to 90%.
“It’s incredibly expensive,” Fraley adds, “but it’s necessary to keep sales going.”
A Market Adjusting to New Norms
Despite these challenges, builders remain optimistic. Barrineau believes Phoenix’s strong job growth and thriving economy will help the housing market normalize. “We just need to weather this unusual period with high interest rates,” he says.
Until then, builders are prepared to continue shouldering the cost of buy-down incentives to make homeownership a reality for more buyers.
