Mortgage rate buydown risk is now hitting resales

The pandemic housing era taught builders to sell price without changing price. Rather than mark down list values, many production builders deployed incentives that simulated affordability through the mortgage, not the sticker. It worked in the moment. Shoppers felt a lower monthly payment, sales teams protected community comps, and backlogs cleared on schedule. The tradeoff is arriving now, quietly and unevenly, through a wave of reset mortgages that reveal the true borrowing cost on homes bought in 2022 and 2023. That is where mortgage rate buydown risk moves from clever marketing to balance sheet externality.

Start with the mechanism. A temporary buydown reduces the buyer’s effective rate for a defined period, often two percentage points in year one and one point in year two, before snapping back to the note rate. The funding comes from the seller or builder and is documented in a buydown agreement. It is allowed by the agencies, with caps on how much and how quickly the payment steps up. Full term buydowns exist as well, although the temporary 2-1 and 3-2-1 structures became the sales workhorse when headline rates jumped.

The popularity was not fringe. By late 2023, industry surveys showed a majority of large builders using buydowns to secure sales. That was not philanthropy, it was math. A subsidized rate cut during the first years of ownership lowered the advertised monthly payment more efficiently than a small price cut, and it did so without angering earlier buyers who had closed at higher list prices.

This is the product logic. When rates shock higher, you defend your conversion funnel by bending near term cash flow rather than touching long horizon price. If rates soon drift lower, the homeowner refinances into a stable payment and nobody remembers the gimmick. If rates stay sticky, the reset exposes the true cost, and the household discovers the home only penciled at the subsidized rate. That second path is what more owners are living through as the average 30 year mortgage rate hovers near the mid sixes, a level that still sits well above pre 2022 norms.

Real world reporting has started to surface the downstream pain. Homeowners who agreed to higher sticker prices in exchange for teaser financing now face a tougher resale environment once their payment steps up. The communities they live in may still be selling new construction, often with a fresh incentive stack that undercuts the math of any would be seller next door. What looked like liquidity at purchase becomes mobility risk during the reset window.

The builder side of this story is not irrational. Incentives beat list price cuts during volatile rate cycles because one dollar of buydown often yields more apparent monthly savings than one dollar knocked off price. Operators also prefer incentives to guard recorded comps for current phases and to avoid souring sentiment among backlog customers. In a world where every comp influences appraisal outcomes and future phases, optical price is part of the product. That is why the largest public builders leaned hard on financing concessions rather than visible markdowns when demand cooled.

Treat the strategy like a software pricing experiment. You can lower churn today with a generous trial that hides true cost behind a time gate, or you can lower price globally and accept the revenue hit now. The first choice keeps dashboards green, protects brand positioning, and buys time. The second choice finds a clearing price that composes cleanly with word of mouth and secondary usage. Builders mostly chose the first path. It preserved quarterly absorption and kept phase releases on cadence. It also shifted risk to a future moment when a cohort of buyers would either refinance, absorb the payment shock, or try to sell into a market still competing with fresh incentives.

The resale math is where this shows up. A homeowner listing a near new house competes against the same builder across the street who can still offer a buydown that makes the monthly feel 300 to 600 dollars lighter for the next buyer. Unless market rates have fallen significantly, that resale is functionally priced against a subsidy that the individual seller cannot recreate. To move the property, the seller often has to cut headline price enough to offset the builder’s financing carrot, or offer their own credits that most households are not set up to fund. The result is a widening spread between new home ask prices and resale clearing prices inside the same community, along with longer days on market for homes that are not paired with aggressive concessions.

There is also a portfolio effect. Builders with in house lenders captured economics on the financing and controlled the customer experience end to end, which made the incentive engine faster to spin up. The more that engine became the default, the more the community’s perceived affordability hinged on continued subsidy flow. That can work for a long time, especially for large operators with fortress balance sheets and dedicated capital market lines. It still changes the character of demand. You end up training the buyer base to expect a deal routed through the mortgage, not the price tag, which can numb the market’s ability to find a true clearing price when you finally try to taper.

Layer in psychology. Buyers who stretched to win a home with a buydown built their monthly budget around the subsidized payment. Refinancing was part of the story they were sold, sometimes explicitly, sometimes by implication. When refinancing remains uneconomic at reset, intent collides with reality. A household that would have stayed five to seven years starts thinking about selling in year two or three. If many do that at once in a single submarket, liquidity thins, and the community narrative shifts from premium new build to noisy price discovery. That is not a foreclosure wave. It is a slow bleed of confidence that shows up as wider bid ask gaps and more selective buyer traffic.

None of this means buydowns are inherently bad. In a falling or stable rate environment, they function like a bridge, giving first time buyers a smoother on ramp while builders maintain a planned price path across releases. The problem is what operators coded into the system during the shock. Instead of balancing incentives with targeted price discovery, the industry leaned into concession engines as the dominant response. Incentives became the product, not the accessory. The result is a cohort of homeowners whose equity story is fragile during the reset window because their comps are still being written by a seller who can print new financing terms at will.

The institutional fix is not complicated in theory. Builders can dial down temporary buydowns in favor of smaller, permanent rate reductions or a mix that includes honest list price recalibration where demand elasticity requires it. They can throttle incentives by submarket and by phase, rather than keeping them as a blanket policy that creates moral hazard for resales. They can also communicate resets with more precision at point of sale, including explicit scenarios for what happens if rates remain in the sixes. The aim is not to remove concessions. It is to stop exporting all of the model risk to future sellers who happen to be your own customers.

There is also a better way to frame ROI. The narrow math says buydowns deliver more monthly payment impact per dollar than a price cut. The system math should include downstream discounting on resales that weigh on appraisals and future phases, along with the reputational cost when owners feel cornered by the reset. A builder that wins the next quarter by optimizing for conversion at contract may reduce pricing power for the next community if too many for sale signs show up on the same block twelve months later. Incentives work best as scalpel, not as autopilot.

Policy will not rescue this. Agency rules already allow temporary buydowns within clear boundaries. Mortgage rates will be set by broader inflation and labor dynamics. What can change is operator behavior. If rates drift down another full percentage point, many of these concerns fade. If rates remain range bound, the reset cohort becomes a stress test for the choice to swap price clarity for time limited subsidy.

What this signals is straightforward. The post boom new home market learned how to sell affordability without repricing the asset. As the reset wave rolls through, the hidden cost is showing up in places balance sheets do not capture well, namely community resale liquidity and household mobility. Builders will keep using incentives because they work. The ones who protect long term price integrity will rethink how much of the affordability story they push through the loan, how consistently they do it, and how transparently they explain the reset to the buyer who will someday be their seller. The market will digest the tactic. Homeowners living through mortgage rate buydown risk are the ones paying for the lesson.