Morgan Stanley: Builders offer mortgage discounts as U.S. home prices remain high
Morgan Stanley's report pointed out that U.S. home builders are lowering mortgage rates for homebuyers by absorbing some financing costs, leading to persistently high home prices. Without this policy, home prices could decrease by 12% to 5%. The "rate reduction home purchase" measures offered by builders attract homebuyers but also prevent homes from being sold at lower prices. The common "3-2-1" structure and "permanent rate reduction" plans significantly impact mortgage bond investors
According to a report from Morgan Stanley, today's U.S. home builders typically reduce mortgage rates for new homebuyers by partially assuming loan funding, but one side effect of these measures is that home prices remain persistently high.
The bank stated that if builders do not assist buyers in obtaining lower mortgage rates through the so-called "buydown" method, home prices associated with the Government National Mortgage Association (Ginnie Mae) could decrease by about 12%. Meanwhile, home prices associated with Fannie Mae or Freddie Mac could be about 5% lower.
Strategists added that developers often offer higher down payment incentives on government-backed mortgages, which are typically obtained by borrowers with lower incomes and credit scores.
High mortgage rates are a significant barrier for potential homebuyers, so companies building new homes attract buyers by offering such incentives, allowing for smoother home sales. However, the report pointed out that this "buydown" policy also prevents homes from being sold at lower prices.
In a report released on Friday, strategist analysts, including Zuri Zhao, wrote: "Without homebuyer subsidy policies, new home inventory levels could be higher, and new home prices could be lower."
The "buydown" options that home builders may offer vary, but a common structure is the "3-2-1" plan. This plan means that the homeowner pays three percentage points less in interest in the first year, two percentage points less in the second year, and one percentage point less in the third year.
Morgan Stanley noted that there is also a "permanent buydown" measure that can permanently lower mortgage rates, which has a more significant impact on mortgage bond investors. The report stated that permanent buydowns are more common in Ginnie Mae mortgages, while they are less common in Fannie Mae and Freddie Mac mortgages.
Morgan Stanley estimates that about 30% of new home sales supported by Fannie Mae and Freddie Mac involve builders providing "buydown" services; this proportion rises to as high as 75% for new home sales linked to Ginnie Mae. Fannie Mae, Freddie Mac, and government housing loan companies support the mortgage industry by bundling mortgages into bonds and providing financial guarantees to investors.
Some reports indicate that the practice of homebuyer subsidies is gradually falling out of favor with builders. Mark Zandi, chief economist at Moody's Analytics, wrote on Monday that builders have "abandoned" this practice because it is "simply too costly."
