watching the new home incentive cycle

Builders in today’s housing market are facing a trifecta of challenges: years of elevated financing costs, weak buyer demand, and a stubborn backlog of unsold inventory. 

Nationally, the number of unsold new single-family homes hit 504,000 in August, marking the highest level since 2007, just before the Great Financial Crisis. While the South is currently experiencing more oversupply than other parts of the country, data from Realtor.com shows that Western markets are running a close second relative to their historical norms. At the same time, overall housing sales activity has cooled significantly below long-term averages. In King County, for instance, year-to-date MLS sales counts from January through October are 24% below the 10-year average for that same period.

Faced with this high-inventory, low-demand environment, developers are increasingly turning to incentives to move their product. These incentives come in many forms, such as design credits or reduced parking and HOA fees, but we are seeing a significant shift toward reducing mortgage rates for the buyer. Many of the country’s largest builders, including D.R. Horton and Pulte Homes, have spent the last decade developing their own in-house lending arms. This allows them to offer extremely competitive mortgage rates that third-party lenders simply cannot match. D.R. Horton, for example, recently advertised a base 3.99% rate on a 30-year mortgage in areas with high oversupply like Texas and Florida. On top of that base rate, they are layering on increasingly popular buy-down programs which reduce the interest rate by a fixed amount in the initial years of the loan. For those unfamiliar with the term, a buydown is essentially a subsidy paid upfront—usually by the builder or seller—to lower the interest rate on a loan (usually for a temporary amount of time). In a common "3/2/1 buydown" scenario on that 3.99% loan, a buyer’s interest rate drops by 3% in the first year, and increases by one percentage point per subsequent year before returning to the base rate of 3.99% for the remainder of the term.

The impact of these programs is visible in the data—the average mortgage rate for new construction was just 5.27% in November, which is nearly a full percentage point lower than average for buyers of existing homes at 6.26%. For buyers who have a reason to purchase today but have been sidelined by high rates, this offers an appealing solution: they can build up their savings during the first years of low rates, and because many buyers believe rates will eventually fall, they still retain the option to refinance after the discounted period ends.

But despite builders like D.R. Horton aggressively marketing these rates, the overall level of incentive offering has remained relatively stable. According to data from the National Association of Home Builders (NAHB), 65% of builders were offering some sort of incentive in November, up modestly from 60% in November 2024.

For historical context, it is typical for the majority of builders to use incentives as a standard marketing tactic, regardless of market conditions. Since the data has been collected, the share of builders offering incentives has rarely fallen below 50%. The only major exception was during the pandemic era, where low interest rates created such a frenzy of demand that the majority of builders did not need to offer anything to sell homes, and the share fell to a low of 43% in July 2021. Conversely, during the Great Financial Crisis, this share spiked to between 70% and 90%, reaching a high of 86% in December 2008.

So while 65% is certainly on the higher side, it is well within the historical norm. This metric is also cyclical, as incentives tend to increase in the second half of the year during traditionally slower selling periods. When viewed over the past three years, the share of builders using these tools has actually been remarkably steady.

However, there is a developing signal that these soft incentives like mortgage buydowns are becoming less effective: price cuts have become more common in recent months, with NAHB data showing that 41% of homebuilders cut prices in November. 

Though this 41% figure is elevated, it is still far from the values seen during the post-2008 period and the average cut has remained consistently between 5-6%. In November 2007, 59% of homebuilders were cutting prices, and the average reduction was much deeper at 10%. Builders today are clearly not yet faced with that level of pressure to sell.

Looking forward, the supply of new homes remains high, but it appears to have peaked. Starts, units under construction, and permits have all topped out in Washington State, suggesting the pipeline is beginning to thin. Builders are now focused on digesting their existing inventory, and we expect they will continue to lean on incentives to drive sales rather than resorting to the drastic measures seen in previous cycles. In many markets across the country, the average new home price on a per-square-foot basis is now cheaper than existing homes (although much of this is due to the larger average size of new builds). Regardless, the current incentive market presents a very compelling value proposition for a prospective homebuyer willing to do the math, and will remain a key area of housing to monitor.