LOS ANGELES — As spring approaches, Americans interested in purchasing newly constructed homes may find themselves benefiting from various incentives aimed at easing mortgage rates and additional costs associated with buying a home.

Many builders are stepping up efforts to attract buyers by providing enticing offers, such as reducing mortgage rates, covering closing costs, or even providing flexible funds that can be utilized for upgrades or other expenses.

Although this strategy is not new, builders are feeling the pressure this year to increase these incentives due to a challenging homebuying landscape.

Persistently high mortgage rates, coupled with stiff competition from existing homes on the market, have underscored how fears of affordability and years of rising home prices have left potential buyers with fewer options.

“They’re facing stiffer competition, a declining number of buyers, and increased costs to make a sale,” stated Ali Wolf, chief economist at Zonda.

Adjusting or reducing these incentives could prove difficult, as buyers have grown to expect them in the current market.

“We should expect builder incentives to persist,” Wolf noted. “Unless interest rates decrease significantly, which appears unlikely, these incentives will remain a necessity.”

Many potential homebuyers remain on the sidelines, particularly first-time buyers who lack equity from an existing home to assist in their purchase. Although mortgage rates have seen slight decreases recently, the average rate on a 30-year mortgage has remained around 7% since November, following an increase from a COVID-19-era low of just above 6% in September, according to Freddie Mac.

To counteract the burdens of heightened borrowing costs, builders have increasingly depended on buyer incentives. The average rate for 30-year mortgages has more than doubled since its record low of 2.65% in the pandemic era. This has prompted many builders to lower prices as well.

Surveys from the National Association of Home Builders indicate that the percentage of builders providing sales incentives has fluctuated between 60% and 64% since June, while those reducing prices has been between 30% and 33%.

The implementation of buyer incentives led to an increase in new home sales last year, even as the resale housing market suffered. Newly built single-family home sales rose by 2.6% last year, totaling approximately 1.02 million units—marking the highest point since 2021, based on data from the U.S. Census Bureau. In contrast, sales of previously occupied homes in the U.S. reached a low not seen in nearly three decades in 2024.

While mortgage buydowns and similar incentives attract buyers, these strategies can negatively impact builders’ profit margins. According to information from FactSet, the average operating margin among 12 major homebuilders, including D.R. Horton, PulteGroup, and Lennar, was 15.08% in the fourth quarter, down from an average of 16.3% the previous year.

Currently, there is concern that builders will need to maintain or even increase buyer incentives to combat the effects of high mortgage rates, especially as home shoppers now have a more comprehensive selection of homes to choose from. Last month, active listings—representing all homes available except those under contract—witnessed a 25% increase compared to the previous year, as reported by Realtor.com.

Additionally, rising construction costs and uncertainties stemming from the previous administration’s trade and immigration policies regarding materials and labor are adding to worries on Wall Street about how builders’ profit margins will perform this year.

BofA Securities analysts conveyed in a recent note that they expect growth in orders for new homes could come at the cost of builder margins. They further indicated that the challenging environment for builders is likely to persist through at least the first half of the year.

Concerns surrounding profit margins have resulted in a decline in stocks related to homebuilders, with numerous companies experiencing a slow start in the stock market this year.

Leading the market is D.R. Horton, the largest builder by closings, which has experienced a 7.5% decline this year. Other notable builders like Lennar and NVR have seen drops of 5.6% and 10.2%, respectively.

Conversely, the SPDR S&P Homebuilders ETF, which tracks various building product companies, has recorded an increase of 1.4%, while the S&P 500 has risen by approximately 4%.