Is cutting price an effective way to create affordability?

By Anthony Grasst, National Sales Director – Builder Division at Homebridge Financial Services

Housing affordability has declined significantly in 2022 and is actually at its lowest level in the past 30 years. Fast-rising mortgage rates combined with home price increases have squeezed out many home buyers. As a result, housing demand has cooled, and builders are seeing a slowdown in sales.

When the market slows, many sellers look to cut price as a way to stimulate demand and create housing affordability. But is cutting price truly the best way to create affordability for your buyers?

In my experience, the answer is “no.”

While a deep price cut can stimulate showings and sales, in general price cuts can create:

  •         Appraisal comp issues
  •         Existing homebuyer dissatisfaction
  •         Struggle to price future phases
  •         Additional concession requests from buyers

With financing, you can create the house payment of home costing thousands less that, dollar for dollar, is 4x as effective as a price cut. In addition, you’ll create housing affordability, lower income qualification, and increase purchasing power.

Let’s look at an example using a 20% down buyer. This will keep things simple by eliminating mortgage insurance and focusing solely on monthly principal and interest payment which is the large part of a buyer’s monthly payment.

Let’s say your home is listed at $620,000 and the current mortgage rate for a 30yr fixed is 6.125%. For a buyer who puts 20% down, their monthly principal and interest would be $3,014/mo.

Due to slow sales, you decide to cut price to $599,000 to hit a lower price point to make the home more appealing to your buyers. How much does monthly principal and interest change with a $21,000 price cut? Under this scenario the monthly principal and interest payment falls to $2,912/mo saving your buyer $102/mo. You cut the price approximately 3.4% and the payment went down 3.4%.

What if we keep the price the same, but apply the $21,000 towards financing? How much would this lower the payment? In this scenario, we keep the original price and down payment, and apply all $21,000 towards a permanent rate buydown.

The net result is a 4.74% rate which would give you buyer a monthly principal and interest payment of $2,584 saving your buyer a whopping $430/mo.

  •         Your buyer’s monthly payment decreased 14.3%!
  •         That’s over 4x as effective at lowering payment as the price cut

What is the most important benefit of this promotion? You just created the same house payment as a home costing $88,000 less! Yes, you heard me correctly. Your $21,000 financing incentive is the same as cutting the price over $88,000!

To learn more about how to create effective housing affordability, you can contact me at 206-245-3656 or [email protected]

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About the Author: Guest Author