How Twin Cities homebuilders are luring buyers back

More homebuilders are offering mortgage buydowns to get potential buyers to the closing table, Axios' James Briggs reports.

What it is: A buydown is when sellers, homebuilders or even lenders pay cash to lower the buyer's mortgage rate by typically one to three points, Axios' Emily Peck explains.

• The cash goes directly to the mortgage lender during the closing process.
• If you're working with a builder, they may require you to work with their preferred lender.

Why it matters: Buyers now have a shot at lower monthly payments and the incentives could help rev up Twin Cities single-family homebuilding, which has cooled significantly in the past eight months.

How it works: Builders pay up front to cut the price of a mortgage for a period as short as two years or as long as 30 years.

• For example, Pulte — a national builder with new construction in Twin Cities — has offered 30-year fixed rates as low as 4.25% in recent weeks.

The intrigue: The most common mortgage buydown puts rates in the mid-to-high 4% range, though some dip into the 3% range, according to Zonda Home, a housing market data and analytics firm.

Zoom in: Twin Cities builders are offering an array of incentives to get buyers back, Katie Elfstrom, vice president of public affairs at Housing First Minnesota, tells Axios.

• In January, permits for new single-family homes in the metro area dropped 46% from a year earlier, per a new report.

Of note: While most of the buydowns are being offered for the typical suburban new-construction homes, some sellers of existing homes are also offering these incentives.

Zoom out: About 75% of builders are dangling mortgage rates that buyers can't find on their own through lending institutions, according to surveys conducted by John Burns Real Estate Consulting.

• 32% of builders are offering buydowns for the entire length of the mortgage.
• 30% offer reduced rates for the first two years of a mortgage.

What they're saying: Compared with a traditional purchase of an existing house, "builders are willing to work with buyers a little bit to get them into that home," Elfstrom says.

The bottom line: Buydowns are nothing new for builders, who have had this tool in their box "forever," Peck reports. But it's a tool most builders are reaching for today.