While the average mortgage rate remains stuck above 6%, buyers of new homes are getting a much better deal, according to one expert.
"So buyers out there today that are buying new homes are not paying 6.5% — the headline rate," John Lovallo, UBS homebuilders and building products analyst, told Yahoo Finance Live (video above). "They’re paying under 5% in most cases."
That’s another big advantage that homebuilders have in this market — their financing — in addition to capitalizing on the low inventory environment in the previously-owned home market.
Builders "have the ability to do this because of the captive finance arms that they have," Lovallo said. "And we think that positions the public homebuilders in particular extremely, extremely well here in this environment."
For homebuyers, a 1-percentage-point difference in the mortgage rate can significantly impact home purchasing power. The monthly mortgage payment on a $400,000 home with 20% down at 5.35% is $1,787. The payment rises to $1,991 at 6.35%. That's over $200 more per month, or $2,400 a year.
A 2-percentage-point difference is even better. And that’s what Pulte Homes was offering earlier this year. The homebuilder recently offered a 30-year mortgage rate at 4.25% for qualified homes under construction through its financing arm. During the time it ran the special, the average rate on a 30-year mortgage ranged from 6.09% to 6.73%, according to Freddie Mac.
"By offering lower rates, we are helping to make our homes more affordable for today’s consumers." Macey Kessler, Pulte Group's corporate communications manager, wrote to Yahoo Finance, "Given the extremely low inventory of existing homes, providing an opportunity for consumers to purchase a new home is more important than ever."
"What the builders have been able to do…is to help buyers find that clearing price," Lovallo said, "whether it's through incentives on lowering the actual price of the home or — what's been happening more often — is buying down interest rates."
Homebuilders are benefiting from higher average mortgage rates in another way: less competition.
Many would-be sellers feel rate-trapped by their current low mortgage rate and have decided against putting their home on the market. As a result, new homes are making up a larger portion of for-sale inventory.
More than a third of homes on the market in April were new construction, the National Association of Home Builders estimated, when that share is typically 13%. The dynamic has buoyed housing confidence among builders, which hit its highest level in 10 months in May.
"I think that what's interesting in going back to the fact that there's very little existing home inventory on the market, to the extent that folks are looking to buy a home, they are more inclined today than at probably at any point in history to look at a new home," Lovallo said.
That lack of inventory is also helping to keep housing prices elevated — another boon to builders.
"Home prices have remained very resilient," Lovallo said, "which I think is a testament to the demand that's out there currently. Also, the fact that there is very little existing home supply."
But for homebuyers in the market, Lovallo concedes: "It is a very tough time."
Rebecca is a reporter for Yahoo Finance and previously worked as an investment tax certified public accountant (CPA).
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