In 1983, the English synth-pop band Frankie Goes To Hollywood sang “Relax, Don’t Do It.”
Most listeners were totally confused by the lyrics though – not realizing that the band was simply imploring homebuyers to NOT fall for interest rate discounts offered by builders.
Sidebar: All of my stupid song references are pre-1995, as I am pretty sure they stopped making music by then. And I am certain they stopped making music after podcasts came out, as I have not heard a single song since then.
Lennar Is Offering 4.25% Interest Rates!
Yesterday, permanent housing bear Lance Lambert mentioned on X that Lennar is offering 4.25% FHA rates.
Among other things, he was trying to illuminate how desperate some builders are.
But the point of my blog is to remind buyers not to fall for huge rate discounts.
Temporary buydowns are one thing, as they are much less costly, they cost buyers nothing, and buyers get a portion of the temporary buydown costs refunded if they refinance.
But, huge permanent buydowns cost a fortune – and they are usually just mechanisms by builders to get buyers to massively overpay for a home.
How Can Builders Offer 3% in a 6%+ World?
I blogged about this before: How Can Builders Offer 3%+ Rates In a 6%+ World?
Long story short: those discounted mortgage rates cost builders as much as 10% of the loan amount (or more). A 4.25% FHA rate would cost at least 10 points today, for example.
Hence, buyers are effectively paying as much as 10% over-market for those new-builds – just to get a lower rate.
And – that may be all well and good … if rates remain high forever. But – I don’t think they will.
And – if rates do fall and those buyers are able to refinance, they will have overpaid for their homes for nothing.
Or, if those buyers move in a few years, they could easily find themselves upside down in a home that they are not able to sell without bringing substantial funds to the table.
