Her builder, Ashton Woods, used its in-house lending arm to offer 3% of her loan amount toward closing costs on top of a $7,500 incentive.
“I did decide to do upgrades, but that wasn’t anything that was included,” she said. “The incentives themselves were really beneficial.”
Bolton said that within the 2023 home market, these kinds of incentives are making it easier to overcome barriers to home ownership.
Among these barriers, an upward trend in interest rates and prices has resulted in a slowdown for new home construction compared to the boom of new housing over the past three years.
As one example, permits for new single-family homes in Hutto fell 65% from 2021 to 2022, when interest rates were raised. The trend is holding strong so far in 2023, according to data from the city, with similar patterns in Round Rock and Pflugerville.
Local experts said interest rates as well as home prices are contributing to a decline in new home builds and purchases. The trend is in turn prompting home builders to offer incentives, such as upgraded finishes and contributions toward closing costs.
Dennis Werner, Austin-area sales director for Coventry Homes, said the reduction in new home starts, or builds, over the past year is also contributing to softening sales for new-build homes.
“In previous cycles, there was always abundant inventory, too much inventory, and everyone was slashing prices to get rid of it,” Werner said. “This is different this time. The number of finished new homes on the market is fairly low.”
Incentivizing buyers
To combat the slowing rates of new-construction home purchases, many homebuilders are offering incentives to the buyer.
In-house lending, concessions on some upgrades, buying down interest rates and contributions to closing costs are just some of the ways area homebuilders are appealing to buyers amid high interest rates and reduced demand, said Carissa Bradford, a real estate agent with Coldwell Banker.
Bradford said while interest rates are higher than they were a year ago at an average of 6%-7%, they are far from being a deterrent, simply returning to what might have been considered a reasonable rate prepandemic. For example, pending sales for new homes in May dipped about 4% from where they were in 2022.
“We’re not actually at high interest rates right now,” Bradford said. “That’s a misconception that a lot of people have because they were on the fence about not buying during COVID[-19] because prices were too high, but interest rates were so low.”
Werner said as more inventory reaches substantial completion through the construction phase, new homes are remaining on the market about 30 days longer than they did three months ago.
Coventry Homes, like many area builders, is providing customers with financial incentives to encourage closing on a home as opposed to offering higher-end finishes or upgrades for the home, Werner said.
“The main incentive is adding money towards closing costs or interest rate reduction,” he said.
Homebuyers who previously would have chosen to move to Round Rock and Pflugerville are choosing to purchase new builds in Hutto for affordability as well as the incentives offered by builders in the area.
Rob Vance said he closed on his home in Hutto in August 2022, and he was able to do so because the in-house lending arm of his homebuilder, D.R. Horton, was able to lock him in for a 4.75% interest rate. He said at that time other lenders were approaching 5.5%.
“It was starting to get to the point where I was like, ‘I don’t know what to do because if they keep climbing, we’re not going to be able to afford the payments,’” Vance said.
Rising rates, less demand
When the Federal Reserve began raising interest rates in March 2022, not only did home prices increase, but so did the cost of building a new home, said Clare Losey, a housing economist with the Austin Board of Realtors.
Despite the area being desirable, Losey said builders are reacting to a slowing of demand due to high interest rates, high prices and an increase in the cost of lending.
Mark Sprague, state director of informational capital for Independence Title, said higher interest rates have slowed the purchase of homes slightly due to a large reduction in buying power, and this is not representative of a decrease in value.
Sprague said the Austin-area real estate market remains in high demand, and it is unlikely the values of homes will meaningfully drop. There simply aren’t enough homes in the market for prices to decrease, he said.
“We delayed new home starts the most of any place in the nation,” Sprague said. “That’s because the builders were overbuilding. They released too much.”
While Hutto saw a 65% decrease in the number of new single-family permits filed from 2021 to 2022, Round Rock saw a 10% increase, and Pflugerville saw about a 50% reduction in the same time frame. So far in 2023, lower permit numbers are holding steady in all three cities.
In addition to the limited number of newly built homes available in the market, Sprague said consumers waiting to buy a new home, hoping interest rates will decrease, may also be contributing to the slowdown.
Werner agreed with that assessment.
“If rates dropped significantly, we would just be covered up with people trying to buy homes,” he said.
