The Buydown

On September 17, speaking from Miami, Lennar's chief executive described his company's answer to the mortgage market in a single sentence. Rates, Stuart Miller told analysts, "might go up, but we're buying them down." The second half came straight after: "The cost of our buydown is becoming more expensive."

Later in the call an analyst, Jay McCanless, asked what any lender would be expected to know first: "Is there any way to quantify that?" The finance chief, Diane Bessette, said "it is a hard question to answer." It depended on whether the loan was fixed or adjustable, government or conventional, "an ARM that's 3 years, 5 years, 7 years." Miller closed the subject. "It's a mix."

It was an odd answer from a company that sells houses, and a perfectly ordinary answer from a company that sells mortgages. Lennar does both. So do its rivals, and this autumn the mortgage business has started writing the homebuilding income statement.

The usual picture of a housing slump is falling prices, and some prices are falling. In the NAHB/Wells Fargo survey released October 19, 43% of builders said they cut prices in October, the highest share in the survey's 2020-2026 record. Builder confidence fell to 29, its lowest since June 2012.

But what really moved this year was not the price of a house. It was the price of the money. Freddie Mac's 30-year fixed rate was 5.98% in late February. In the week of September 24 it crossed 7%, for the first time since January 2025, and on October 22 it stood at 7.32%, against 6.19% a year earlier.

Suppose you are borrowing $403,000, the average loan M/I Homes' mortgage company made last quarter. At last year's rate, principal and interest come to about $2,466 a month. At this year's, about $2,768. Nothing about the house has changed, and it costs you about $300 a month more.

A builder has a choice about how to close that gap. It can cut the sticker price, which every later buyer in the subdivision can see. Or it can pay, at closing, to lower the buyer's rate and leave the sticker where it was. That is the buydown, and it is not a niche tactic. M/I's chief executive, Robert Schottenstein, told analysts on October 21 that "nearly every builder is buying down rates."

Where the payment lands is the interesting part.

M/I, a Columbus builder in its 50th year, spells out the accounting in its quarterly report, filed October 23. Closing-cost allowances and buydowns are "recorded as a reduction of housing revenue at the time the home is delivered." A subsidy on a mortgage that may run for decades is booked, on the day of closing, as a smaller sale.

So the bill turns up in revenue. M/I's third-quarter revenue and average sales price "reflect a $73.2 million reduction for sales incentives and closing costs," which works out to about $32,700 a home, up from $23,300 a year earlier. The filing then isolates the part that matters: the buydowns alone grew by more than the whole reduction did. Whatever else was in that reduction, M/I gave less of it. What it gave instead was interest.

Then the bill turns up in margin. M/I's homebuilding gross margin fell to 18.4% from 21.5%, and the company names the cause: profit fell "primarily as a result of higher lot costs and the increased cost of mortgage interest rate buydown incentives." Go looking in the income statement for the interest M/I is paying on its customers' behalf and you will not find it. There is no line called interest. There is only a house that sold for less.

Meanwhile the mortgage company has become the front door. About 96% of M/I's buyers who used a mortgage last quarter borrowed from M/I Financial, up from 93% a year earlier. That, Schottenstein said, is "not dumb luck." PulteGroup's capture rate, as builders call it, was 85%; Lennar's was 83%. Miller was plain about why it matters. The in-house lender, he said, is "the mechanism that makes these programs work."

It is lending without the balance sheet. Pulte sells substantially all its loans "generally within 30 days." M/I sells them "shortly after origination." The investors who buy the loans collect the interest. The builder pays for the lower rate up front, out of the price, and keeps a sliver of the lender's risk: M/I will buy back a loan whose borrower falls behind in the first six months, a promise that now covers $790.7 million of loans.

That arrangement is comfortable while the gap is small. In September the gap stopped being small.

M/I's finance chief, Phillip Creek, walked through the quarter a month at a time. New contracts were "up 15% in July, down 6% in August, and down 16% in September." Incentives, he said, "definitely did increase as we went through the quarter," and buyers were moving "a little bit more toward ARM products," adjustable-rate loans.

PulteGroup, reporting on October 22, said rates "increased sharply during the third quarter of 2026, most notably during September." Its incentives rose to 10.4% from 8.9% a year earlier, and its quarterly report is unusually direct about what comes next: "we expect our sales incentives to remain elevated." Pulte has a cushion: more than 60% of its business is move-up and active-adult buyers. Even Miller concedes that at the higher end "there's a lot less impact from what the affordable end is feeling right now." Lennar sells to the affordable end. Its numbers point the other way.

Lennar's numbers cut against all of this and deserve a fair hearing. In its quarter to August 31, sales incentives fell to 12.0% of revenue from 14.3% a year earlier, and its own filing says "sales incentives on deliveries declined during the quarter."

Put that in time. Lennar's quarter ran from June through August, when the 30-year rate averaged 6.56%, slightly below the 6.71% of the same months a year before. The weekly rate did not cross 7% until September 24, more than three weeks after Lennar's quarter ended. Lennar was also coming down from the highest incentive rate on the chart: a year ago it was giving back $64,100 a home.

Nor did the subsidy disappear. It moved. In several regions Lennar describes "pricing to market through a decrease in base prices," and its average sales price fell to $372,000 from $383,000. Its gross margin, 15.8%, is the thinnest of the three. Miller calls that a strategy, not a misfortune: "It is deliberate, and it is not something the market is doing to us." Whether the subsidy sits in an incentive line or in the base price, it lands in the same place, revenue per home.

Lennar guided to a gross margin of 15.5% to 16.0% for the quarter now under way. It gave that number in mid-September, before the weekly rate crossed 7%. That is the quarter to read.

When the seller starts paying your interest rate, stop reading the sticker price. Read revenue per home and gross margin, because that is where the subsidy is booked, and read the capture rate, because it tells you who is writing the loan. A builder can hold its list prices all winter. It cannot hold its average selling price while it pays for the mortgage, and the quarterly report will show it while the list price has not moved at all. The homebuilders have become lenders for about a month at a time. They pay the interest in the price.