Are Buydowns Inflating Home Prices?

TLDR: Are mortgage buydowns keeping home prices elevated nationally? No. National builders that overbuilt in Sunbelt metros are using buydowns to support pricing and sustain sales as buyers focus on affordability, while in cities where home prices are still rising, it’s not incentives but supply shortages driving gains. In conclusion, we need to build more houses to drive home prices down.

In this article, I examine recent home sales data, quarterly earnings from major homebuilders, and metro-level trends in year-over-year price performance and inventory levels to understand what’s keeping housing prices elevated in many markets.

The housing market delivered a strange split this spring.

In April 2025, new home sales climbed to their highest level since 2022 (Bloomberg), while existing home sales fell to their lowest April reading since 2009 (Bloomberg). My first instinct was to credit the strength in new home sales to builder incentives, as they improve affordability and allow sellers to keep prices elevated. This felt especially true after reading Bloomberg’s report that mortgage aid was lifting home prices (Bloomberg)

At first, that explanation made sense. Large builders such as D.R. Horton and PulteGroup continue to rely on buyer incentives to sustain sales. Mortgage rate buydowns, closing cost assistance, and upgrade credits are being used to soften the impact of high interest rates. These tools are targeted directly at the one thing homebuyers care most about right now: affordability. With rates near 7%, most buyers are considering both the listing price as well as their monthly payments. 

But the most recent data suggests these incentives are only working in certain parts of the country, mostly in areas where national homebuilders dominate and have built more homes than the market can absorb.

In June, new home sales increased just 0.6% from the prior month, falling short of expectations. The median new home price declined nearly 3% YoY to $401,800, marking the fifth annual drop in the last six months. Inventory climbed to more than 500,000 homes, the highest level since 2007. Despite the added incentives, many buyers are still not moving. For most, the math does not work.

Existing home sales tell a different story. Prices hit a record high of $435,300 in June, even as sales dropped to a nine-month low. Many homeowners are sitting on mortgage rates far below current levels and are not listing. Inventory remains tight, and buyers are facing affordability walls on all sides.

Q2 earnings from the top builders confirmed what the national data already hinted at. D.R. Horton lowered its full-year revenue outlook and reported a 4.1% decline in closings (WSJ). PulteGroup beat expectations, but only by increasing its incentives, which now represent nearly 9% of the average sale price (Reuters). In June, more than one third of builders reported cutting prices. This figure will likely continue to rise in July (Investopedia).

Mortgage buydowns are not what is keeping prices elevated across the country. These incentives are more of a survival tactic in Sunbelt markets where inventory has piled up. Builders are using them to stay competitive, not to drive prices higher.

What is really keeping home prices elevated in many markets is the same force that has defined the housing landscape for years - there just aren’t enough homes. In supply-constrained metros where construction is limited and demand remains strong, prices are rising with or without incentives. In oversupplied Sunbelt markets, builders are using buydowns to avoid price cuts and move inventory.

Mortgage buydowns can support sales in certain places. But they do not explain why home prices remain high in most of the country. The real driver is scarcity. And the buyer’s main concern is not whether a home comes with incentives. It is whether they can actually afford it.

Mortgage buydowns are temporary interest rate reductions that builders pay upfront to reduce a buyer’s monthly payment. These buydowns typically last one to three years and are used to make new homes feel more affordable even when mortgage rates are high.

Here’s how it works. Suppose a 30-year fixed mortgage rate is 6.8%. A builder might offer a 3-2-1 buydown, which lowers the rate to 3.8% in year one, 4.8% in year two, and 5.8% in year three, before returning to the full 6.8% rate in year four. That can reduce a buyer’s monthly payment by hundreds of dollars early on, giving them breathing room during the initial years of homeownership.

Builders can afford to offer these incentives because they control both inventory and financing through their in-house lenders. They often pair buydowns with closing cost credits or upgrade packages to make the offer even more attractive. The goal is not to maximize profit per home, but to keep sales volume steady and move product quickly in competitive markets.

Individual sellers cannot match this, which makes new homes more affordable compared to existing homes if they are selling in similar price ranges. 

Buydowns are not spread evenly across the country. They are concentrated in Sunbelt markets where national builders dominate and inventory has climbed. Phoenix, Austin, and Tampa are leading examples.

Phoenix, AZ is one of the most oversupplied markets in the country. As of mid-2025, active inventory surpassed 14,700 homes, a 25% increase YoY. Pandemic-era migration into Arizona has slowed (Reventure), and with fewer buyers and more listings, builders are leaning heavily on incentives. Lennar, D.R. Horton, and PulteGroup all offer multi-year buydowns in the region (Homes.com). Despite that, Parcl Labs reports the Phoenix home prices have fallen 3.4% YoY (ParclLabs)

Austin, TX is facing pressure from both the new and resale markets. Active listings are up 43% YoY (Teamprice). New home starts have outpaced demand, and buyers are choosing between discounted existing homes and new builds with rate buydowns. Builders, such as Brookfield Residential, are offering 2-1 and 3-2-1 buydowns, but prices continue to weaken. The median new home value in Austin dropped 6.9% YoY (ParclLabs)

Tampa, FL is dealing with both oversupply and affordability pressure driven by rising insurance costs (Axios). According to ParclLabs, home prices have fallen 4.8% YoY.. Homeowners in the region face some of the highest insurance premiums in the country, with proposed rate hikes of up to 14% for 2025 (NewYorkPost). These elevated costs have weakened buyer demand. In response, builders are layering on incentives. M/I Homes is offering a 2-1 buydown program and up to $100,000 off select quick move-in homes (M/I Homes), but despite these efforts, pricing power remains limited.

Across these metros, the pattern is consistent. Builders are using buydowns to compete in oversaturated markets where prices are already under pressure. The incentives are keeping sales from collapsing, but they are not keeping prices elevated.

Incentives may be helping builders avoid cutting prices more dramatically. But they are not driving home values higher. In most cases, they are just slowing the decline.

Not every housing market is being held up by builder incentives. In cities where supply is structurally limited and demand is steady, prices are still climbing. These are not markets where buydowns are doing the heavy lifting. They are markets where scarcity is.

Buffalo has seen a 5.8% increase in home values in 2024 and is projected to rise another 3% in 2025, according to Zillow. The local economy is adding two jobs for every home built, creating a mismatch that is pushing prices higher. The city continues to attract young professionals and families, but construction has not kept pace (GlobeSt).

Cleveland is experiencing a ‘boomerang migration.’ Former residents are moving back, often to be closer to family or to take advantage of job growth in healthcare and education. The result has been a solid 3.1% increase YoY in home prices (ParclLabs). Inventory is tight, especially in neighborhoods near schools and employment hubs.

Milwaukee ranks as one of the top-performing housing markets in the country, with home prices up 5.1% YoY (ParclLabs), driven by a long-term shortage of new construction. According to the Wisconsin Institute for Law & Liberty, Milwaukee has the second-lowest housing supply among major U.S. metros, with just 1.6 months of inventory. First-time buyers are being hit especially hard, as price growth is strongest in the lowest-priced tiers. As of early 2025, homes under $231,000 have appreciated 13.1% YoY, making it one of the hottest affordable markets in the country (Will-law)

These markets have a few things in common. National builders are mostly absent (due to a variety of factors and their business model), while high costs, restrictive zoning, and slower permitting processes limit the pace of new construction. At the same time, steady demand continues to put upward pressure on prices.

When new supply is constrained, prices rise because demand has nowhere to go. In these markets, builder tactics play little to no role. The true driver of price appreciation is persistent scarcity.

Even with incentives in some regions, the national housing picture remains difficult for buyers.
As of June 2025, the median existing-home price was $435,000 (NAR), the average 30-year mortgage rate hovered around 6.8%, and first-time buyers made up just 30% of transactions, well below the long-term norm of 40% (Reuters)

Affordability is being squeezed on both ends. On one side, new homes are still too expensive for many households, even with temporary rate buydowns. On the other hand, existing inventory is limited. Most owners are sitting on mortgage rates far below current levels and are reluctant to give them up.

According to Goldman Sachs, 87% of homeowners have mortgage rates under 6%. Nearly two-thirds are at least two percentage points below today’s average. This has created what the National Association of Realtors calls a “lock-in effect.” Buyers don’t want to trade a 3% loan for a 7% one (CalculatedRisk)

Federal Housing Finance Agency research shows how powerful that friction can be. For every one-point increase between a homeowner’s rate and the market rate, the probability of a sale drops by 18.1%. This dynamic prevented over 1.3 million home sales from mid-2022 to the end of 2023 and pushed prices 5.7% higher due to supply shortages, even as high rates exerted downward pressure (FHFA). A recent study by Bankrate found that only 3% of homeowners feel comfortable listing their homes (Homes.com)

The result is a no-win scenario for many buyers. New homes come with incentives but still stretch budgets. Existing homes are scarce and often overpriced relative to income. Even though listings have increased modestly, affordability has not improved.

Mortgage buydowns can help in specific neighborhoods. They may make payments more manageable for a few years, but they do not fix the core problem- the housing market remains constrained by high borrowing costs and years of underbuilding. Incentives are a bandage, not a cure.

Mortgage buydowns are helping builders keep sales moving, but they are not the force holding up the housing market. In metros like Phoenix and Tampa, national builders are leaning on incentives to manage excess inventory and protect market share. In many cases, the goal is simply to avoid further price cuts.

By contrast, cities like Buffalo, Cleveland, and Milwaukee are seeing prices climb without any builder involvement. Demand in these areas has remained steady, but new supply continues to lag. With construction limited, prices are rising on their own.

These findings is the heart of my investigation. Buydowns may help close deals, but scarcity is what is sustaining home values. Where homes are limited, prices stay high. Where builders added too much supply, incentives are a way to keep pace. Mortgage buydowns are propping up prices only in a select few overbuilt markets. 

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