The Big Buydown Bet

If you're not in a rush for housing, it's probably better to improve your credit instead of getting a subprime mortgage.

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Good morning. If you bought the Great Value raw frozen shrimp at Walmart, throw it away. The FDA says a possible contamination from Cesium-137, a radioactive isotope, has been detected. Don't sell it, don't serve it, and definitely don't eat it — no matter how much BI's Katie Notopoulos may want to.

In today's big story, homebuyers made a big bet on lower mortgage rates. They're paying a high price.

What's on deck:

Markets: Bank of America thinks these 10 cheap stocks are poised for big gains.

Tech: This party is the surest sign yet that the tech dating scene is a mess.

Business: In its latest hardcore turn, AT&T is hitting some managers with an ultimatum.

But first, betting the house.

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The big story

The big buydown bet

Getty Images; Tyler Le/BI

For homebuilders, it represented a silver bullet. For buyers, it can be a mousetrap.

Rick Palacios Jr., the director of research at John Burns Research and Consulting, has been sounding the alarm since last summer about a dangerous gamble tempting Americans: "mortgage rate buydowns."

They seemed to offer an elegant solution. With mortgage rates sky-high, your dream home might feel out of reach. That's not good for you, nor for the homebuilders stuck with inventory.

But what if a homebuilder shaved a percentage point off your monthly payments, even just for the first couple of years? Surely, rates must drop soon. When the deal runs out, you could refinance. Easy.

The cost to builders is the upfront cash to lower the rate via their in-house lenders. Matt Hutton, a millennial homebuyer, told BI his builder threw in $30,000 in incentives — including the buydown — to close the deal.

You buy your house. They sell theirs. Crucially, the official listing price doesn't change, so home values remain inflated.

That was the wager a few years ago. Today, rates are typically still above 6.5% — right where buyers had hoped not to end up. Their gamble has failed spectacularly, BI's James Rodriguez writes.

Andre Rucker for BI

There's an even more dire scenario, Palacios warns.

What if you need to sell?

Life happens — a new job, a marriage, a divorce — and you may have to move. But today's sellers face a weak market. In many parts of the US, more homes are sitting unsold than at any point since the pandemic.

Buyers a few years ago may have accepted inflated prices in exchange for monthly savings — but they can't usually pass those savings along to the next buyer. To close a deal, they may have to take a loss.

Just ask Hutton. After five years, he and his wife sold their first home for a $150,000 profit and upgraded to a bigger, brand-new home for nearly $800,000.

A few months later, they wanted out.

They ended up selling it for roughly what they paid for it, after dropping their asking price by $50,000.

In addition, the buyer asked them to cover a $40,000 buydown to match the builder's ongoing incentives for nearby homes. They agreed.

Today, Hutton and his wife are back in an apartment, waiting for another shot at the dream.

3 things in markets

1. Wage growth isn't keeping up with prices. However, some industries have enjoyed more growth than others. Business services and financial activities have less purchasing power than they did in 2021, while hospitality and healthcare workers have more.

2. Bank of America shares 10 ultra-cheap stocks primed to rebound. The bank thinks the days of large-cap stock dominance are numbered. If the US enters a recovery phase alongside rate cuts, beaten-down stocks could surge.

3. A short-seller explains why he thinks Palantir is overvalued. In a new note, Andrew Left's firm Citron Research used OpenAI's $500 billion valuation as a benchmark to measure the defense tech giant against. Even if Palantir fell to $40 a share, it'd still be expensive, the firm said.

3 things in tech

Thomas Maxwell/ BI

1. Inside San Francisco's "enforced ratio" party in a Tesla showroom. Fed up with male-dominated spaces in SF, two women who work in the tech industry threw a bash centered around "feminine energy." It offered a rare chance to dress up and a strictly enforced 50/50 gender ratio — which, of course, left hundreds of men on the waitlist.

2. Another W for Tim Cook. The Apple CEO notched a win in his fight with the UK government, which had ordered the company to make encrypted user data accessible to it. Apple enjoyed the backing of the US government, which said that the UK had agreed to drop the order.

3. Do you miss the old internet? There's an app for that. Perfectly Imperfect is a newsletter and social network that's designed to feel like the old version of the internet, reminiscent of Tumblr and MySpace. Its founder told BI it's betting on events and community-focused tools to grow.

3 things in business

Ronald Martinez/Getty Images

1. AT&T tells some managers: Relocate or get laid off. The telecom company is consolidating 22 internal help-desk centers into six US locations. Affected managers get two weeks to decide whether to move or lose their jobs and get severance, BI's Tim Paradis and Dominick Reuter exclusively report.

2. Spike Lee's Colin Kaepernick doc is officially game over. The acclaimed director has no plans to shop around his scrapped ESPN docuseries about the retired football player to other platforms. "That thing fell apart a year ago," Lee said in an interview with BI's Jason Guerrasio. "I've moved on."

3. We still don't know if Trump is getting free ads from Paramount. Trump says Larry and David Ellison promised him millions in free ads, but Paramount CEO David Ellison doesn't want to comment on it. We shouldn't be left guessing about what's true, writes BI's Peter Kafka.

In other news

• Meta CTO gives his short-term and long-term predictions for AI's impact on software engineering.
• Wall Street bosses want junior bankers to come clean about PE jobs. It won't be easy.
• A CPA couple who invest in real estate on the side share the investment mistake that cost them about six-figures worth of 401(k) money.
• What investors should be listening for in Jerome Powell's Jackson Hole speech.
• OpenAI chairman compares AI to the dot-com boom: There's lots of "snake oil" but some "real value being created."
• What the "hidden job market" really is and how to make it work for you.

What's happening today

• Federal Open Market Committee meeting minutes published.
• Lowe's and Target report earnings.
• Made by Google event to launch latest devices, including Pixel smartphone.

Hallam Bullock, senior editor, in London. Meghan Morris, bureau chief, in Singapore. Akin Oyedele, deputy editor, in New York. Amanda Yen, associate editor, in New York. Lisa Ryan, executive editor, in New York. Kiera Fields, editor, in London. Dan DeFrancesco, deputy editor and anchor, in New York (on parental leave).