I've been looking at real estate lately because I'm considering buying a house in Houston. It's quite strange to observe large construction companies like Lennar.

They don't drastically lower home prices. Instead, these days, if you buy a house, this company offers a ton of incentives.

They cover closing costs, lower mortgage rates, and add various benefits.

Just looking at the ads, you might think, "Can I really buy a house under such great conditions?"

However, just because Lennar lowers mortgage rates doesn't mean that mortgage rates in the U.S. are actually going down.

If the market rate is 7% and buying a Lennar home gives you a rate in the 5% range or lower, someone has to bear that difference.

Ultimately, the builder is essentially covering part of the buyer's interest by sacrificing some of their profit.

Why go to such lengths? Because they need to keep selling homes.

Companies like Lennar are not individual homeowners with one or two houses.

They are companies that need to keep developing land and building homes. If the homes they've already built aren't selling, they can't fund the next ones.

So, instead of drastically lowering the price of a $400,000 home to $350,000 and ruining the market price, they choose to offer incentives worth several thousand dollars.

Looking at the graph, the average price of homes sold by Lennar peaked at nearly $490,000 in 2022.

However, it has now dropped to around $370,000. Of course, you can't just look at this and say that the price of the same house has fallen from $490,000 to $370,000.

Even if they sell more smaller homes, the average price will go down. Still, the trend has definitely changed.

From 2020 to 2022, people were lining up to buy homes as soon as they were built.

Now, builders have to do everything they can to lower monthly payments to get buyers to act.

Here, the truly scary number is if we cross the threshold of an 8% mortgage rate.

Let's say you borrowed $400,000 with a 30-year mortgage.

At a 6% interest rate, the principal and interest would be about $2,400 a month.

If it goes to 7%, it would be about $2,660, and at 8%, it would be about $2,935.

Just a rise from 6% to 8% results in a difference of over $500 a month.

When you add Houston's significant property taxes, home insurance, and HOA fees, the situation changes completely.

The home prices remain the same, but people can no longer afford to buy them.

So, what happens to the market? Initially, home prices don't drop immediately. Transactions decrease first.

Then, as homes don't sell, inventory builds up. Builders offer more incentives. Individual homeowners also hold out at first.

But after months of not selling, some will eventually start lowering their prices.

This issue is even more interesting in the newly developed areas on the outskirts of Houston.

Let's say I put my house, which I bought for $400,000 three years ago, on the market for $400,000.

But right next door, the Lennar sales office is selling new homes for $400,000 while lowering mortgage rates and covering closing costs.

Who would buy my used home? Ultimately, I would have to lower my price too.

So, the incentives from Lennar are not just a problem for Lennar. They can also put pressure on surrounding home prices.

That said, it's hard to directly call the current situation 2008.

In 2008, the issue was that loans were given recklessly to people who couldn't repay them, and when home prices fell, delinquencies and foreclosures exploded, flooding the market with homes.

Many U.S. financial companies were shaken as well. Right now, at least, the structure is not the same.

However, if mortgage rates of 8% don't just spike and then drop but persist for a year or two, the story could change.

People's salaries don't suddenly rise by 20%. Ultimately, the price at which homes can be bought must decrease.

So, these days, I'm paying more attention to how many incentives builders like Lennar are offering rather than just looking at Houston home prices.