By Scott Carpenter, Bloomberg
Home-building companies now commonly reduce borrowers’ mortgage rates on new homes by kicking in some of the financing, but one byproduct of those efforts is that they’ve kept home prices elevated, according to a report by Morgan Stanley.
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Homes tied to Ginnie Mae mortgages could be around 12% cheaper if builders weren’t helping borrowers obtain a lower mortgage rate, through what’s known as a buydown, the bank said. Meanwhile, prices of homes with Fannie Mae or Freddie Mac mortgages may be around 5% lower.
Builders have tended to offer larger buydowns on Ginnie mortgages, frequently obtained by borrowers with lower incomes and credit scores, the strategists added.
High mortgage rates are a major deterrent to prospective home buyers, so by offering such incentive on new homes the companies that build them can keep the pipeline of home sales humming. But the flip side is that buydowns keep homes from getting sold at lower prices, the report said.
“Without buydowns, new home inventory would likely be even higher and new home prices would likely be even lower,” strategists including Zuri Zhao wrote in a report published Friday.
The kinds of buydowns a home builder may offer vary, but one typical way is a “3-2-1” structure. This involves offering to pay for three percentage points of a homeowner’s mortgage the first year, two percentage points the second year and one the third year.
There are also buydowns that permanently reduce mortgage rates, a category that has a more significant impact for mortgage-bond investors, according to Morgan Stanley. Permanent buydowns are more prevalent for Ginnie Mae mortgages than for Fannie or Freddie mortgages, the report said.
Around 30% of new home sales supported by housing giants Fannie Mae and Freddie Mac are receiving buydowns from builders, while about 75% of new homes tied to Ginnie Mae are receiving them, Morgan Stanley estimated. Fannie, Freddie and Ginnie support the mortgage industry by packaging mortgages into bonds and providing investors with a financial guarantee.
Some reports suggest that buydowns are falling out of favor with builders. Mark Zandi, the chief economist at Moody’s Analytics, wrote on Monday that homebuilders are “giving up,” because the practice is “simply too expensive.”
