The American Enterprise Institute (AEI) has called on Fannie Mae and Freddie Mac to end their exemption of permanent buydowns from financing concession rules, saying the pass elevates new home prices by as much as 12%.
The change could be accomplished, economists at the conservative think tank say, by requiring lenders to value the difference between the buydown rate and the market rate using mortgage-backed securities (MBS) prices to calculate the value of the buydown.
To combat higher mortgage rates, buydowns in which the seller pays a fee to the lender to lower the rate, usually for the first few years, but sometimes over the life of the mortgage, have become prevalent over the last three years, especially in the new home market.
AEI’s Housing Center has been arguing for some time that permanent buydowns allow buyers to qualify for higher-price homes at lower rates, thereby increasing their buying power and allowing builders to sell more houses without having to cut their prices. The net result: Elevated home prices that have no relation to true value.
“After 3.5 years of heavy use by large builders, permanent buydowns continue to keep new home prices elevated,” AEI Co-Director Edward Pinto said. “As of December 2024, home price appreciation for new homes sold by the largest builders was about 6% above that for both existing-home sales and new homes sold by the non-largest builders.”
But that percentage, Pinto adds, “understates the magnitude of the impact since this comparison includes homes without a permanent buydown.”
Using new homes sold by smaller builders without a permanent buydown as a control group, AEI says the largest 19 builders appear to have avoided an estimated 10–12% price cut through the use of permanent rate buydowns.
At the same time, AEI believes year-over-year price gains will slow to 0.5% in November, with some areas experiencing negative appreciation. AEI also expects year-over-year values to remain flat to slightly negative “for the next few years.”
Currently, permanent buydowns funded with a forward commitment are not subject to Fannie Mae and Freddie Mac’s maximum financing concession rule. But they should be, says Pinto. “It is time for the GSEs to end their exemption.”
