Homebuilder Buydowns Bolster Access, Not Higher Home Prices

A recent American Enterprise Institute analysis ignited a spark.

A Wall Street Journal piece that followed on the heels of the AEI report fanned the flames into a scandalous narrative: Permanent mortgage buydowns — particularly those enabled by bulk forward commitments from large, mostly public, homebuilders — act as a quiet force that inflates home prices and puts buyers at risk.

But the assumption underlying that framing makes it worth a time-out to ask a few questions. Inflated relative to what? Riskier compared to what?

And, importantly, compared to which alternative market reality?

Because, despite the intensity of the criticism, very little of the public argument engages with what the buydown replaces. Not an ideal world — a real one.

In reality, at least a large percentage of the time, affordability breaks down at the monthly payment level, not at the sticker price.

A recent Zelman & Associates research report — The Bull Case for Mortgage Rate Buydowns — offers a sharply contrasting view of homebuilders’ long-standing “toolbox” of incentives and concessions to navigate cyclical slowdowns.

Where AEI sees distortion, Zelman sees math. Where headlines see risk, Zelman sees risk put into its proper context. And where critics call for price cuts, Zelman quantifies the potential unintended collateral damage.

To ensure this analysis fully grapples with the strongest version of AEI’s position, we asked the report’s authors, Ed Pinto, Senior Fellow and Co-Director, AEI Housing Center, and Sissi Li, Senior Manager of Data Analytics, to respond to the gist of our counter-argument. Pinto’s reply lays out a clear rationale rooted in the history of concession regulation, concerns about valuation integrity, and the belief that current buydown practices shift risk from sellers to taxpayer-backed entities.

Pinto argues that seller concession caps were created in 1985 specifically to prevent distortions in market value and elevated credit risk. Because permanent buydowns funded through forward commitments now operate at scale and materially affect pricing, he believes they function like the very concessions the rules were designed to limit. What was once a minor factor in the marketplace has, in his view, become a major one with measurable valuation consequences.

“If something looks, walks, and smells like a seller concession, it is one, and it should be treated as such,” Pinto tells The Builder’s Daily.

He maintains that if buydowns were counted toward seller concession caps, a substantial share of new-home loans would exceed allowable thresholds—signaling heightened credit risk for Fannie, Freddie, and FHA. In his view, these agencies—and ultimately taxpayers—are taking on risk that should instead be borne by market actors, especially in a period he characterizes as an ongoing and geographically spreading home price correction.

“The first law of risk management is: when in a hole, stop digging,” Pinto says.

He argues that permanent buydowns keep new-home prices above their “true market value,” delaying necessary price correction and putting buyers who don’t use buydowns (such as cash buyers) at a disadvantage. He frames this as both a valuation distortion and an issue of market fairness, exacerbated by what he expects to be continued home-price disinflation and potential deflation over the next several years.

He concludes that the exemption allowing forward-commitment-funded buydowns to avoid concession caps should end. He recommends that the GSEs and FHA phase out the exemption over six months—mirroring the 1985 implementation—allowing builders time to adjust while restoring what he sees as necessary prudential guardrails.

Still, this framing stands in direct contrast to the Zelman evidence and industry behavioral data discussed in the next section, underscoring the central debate: whether buydowns constitute a distortionary subsidy or a modern mechanism for affordability.

Let’s dive deeper.

The critique begins in good faith — and then leaps past its own data

AEI is right that permanent buydowns became normalized when 3% mortgages disappeared. They’re right that large public builders can deploy them more aggressively than small or private operators. They’re right that a rate buydown can keep top-line pricing steadier than a 10–20% price haircut would.

However, the narrative takes a tenuous turn when it assumes that a high sticker price paired with a low interest rate equals a ticking equity bomb.

It can — in isolated circumstances. Short-tenure owners, markets with fast inventory injections, and borrowers with minimal cushion. Those cases exist.

Yet the national story is broader than those edge conditions.

Let’s start with a fair perspective on buydowns as part of that homebuilder’s tactical toolbox for slow, choppy, and iffy sales periods. Zelman research notes:

“Over 70% of builder mortgage originations now carry some form of rate buydown. Even more notable — 55% of those loans price in at least 100 bps below market.”

Another point in Zelman’s analysis is telling: If buyers are underwater on paper but the monthly payment is deeply “in the money,” their incentive to preserve ownership rises, not falls. The risk of foreclosure doesn’t spike — it diminishes.

This contrasts with 2007, when adjustable loans increased and pushed borrowers out of homeownership like a wave crashing beneath them. Today, many borrowers are locked into payments that are cheaper than rent. Their housing choice — not their price-to-equity ratio — is what influences their behavior.

The AEI paper treats payment structure and equity risk as interchangeable. They are not.

Data alone doesn’t resolve a narrative — context does.

To AEI’s credit, their argument isn’t irrational. If you isolate price without considering monthly cost, incentives resemble inflation. If you isolate equity without considering tenure, underwater risk looks explosive. If you isolate Government Sponsored Enterprise concession caps, forward commitments appear to be a loophole.

But the housing market does not operate based on isolated factors. It functions where payment power, tenure length, inventory scarcity, and capital structure intersect. Most critiques of buydowns focus on the first factor without considering the other three.

That’s why Tyler Williams’ earlier The Builder’s Daily analysis was so critical. Tyler asked the correct root question: “Are mortgage buydowns a lifeline — or a risk?”

He laid out the tension honestly:

• AEI sees inflated pricing and underwater exposure.
• Builders argue that payment, not price, determines affordability.

Zelman’s research acts as an empirical tiebreaker.

Builders choose buydowns because the math leaves no other rational option

If a $400,000 home doesn’t pencil for a buyer at a 7% mortgage rate, builders have two levers:

1. Cut the price
2. Buy down the rate

Not aesthetically — mathematically — these are not equivalent solutions.

Zelman runs the numbers more clearly than anyone else has to date:

• Spend 7% of gross margin on a base-price cut: Payment drops only modestly
• Spend the same 7% on a permanent buydown: Payment meaningfully falls into reach

It’s the same money spent in two very different ways. One slightly eases the buyer’s burden. The other fully solves it. A homebuilder would need to cut the price by roughly 20% to match the affordability impact of a 200bps permanent buydown.

That’s a known money-loser, and a home affordability show stopper.

What’s more, when you cut the price by 20%, you don’t just help the one buyer in front of you. You instantly re-price every buyer behind them. You erase equity for the first households through the door. You reduce comps. You undermine your own appraisals.

Veteran strategists in this business learned this lesson decades ago — long before forward commitments existed. As one long-time industry operator told us:

“Never discount your base price if you can avoid it. A price cut hurts every buyer who came before.”

Buydowns don’t rewrite history. Price cuts do. Buydowns, on the other hand, act as a pressure valve. They ease the buyer’s burden without causing a neighborhood backlash.

That’s the core point of this debate. Setting rhetoric aside, basic economic principles work like this:

A dollar applied to rate buys substantially more affordability than a dollar applied to price.

Critics argue builders should just “drop prices.” Zelman quantifies what that world would actually look like — and the consequences get uncomfortable fast:

• Deep price compression leads to collapsing comps
• Collapsing comps lead to eroding homeowner equity
• Eroding equity leads to tighter credit and contracting production
• Contracting production leads to even less affordability

It’s not just a worse outcome for builders. It’s a worse outcome for homebuyers.

The most misunderstood piece of all may be the behavioral one

Listen carefully to Ken Gear, CEO of Leading Builders of America — someone long embedded in homebuyer psychology:

“Buyers don’t evaluate affordability as price. They evaluate it as payment.
Down payment plus monthly carry is the decision driver.”

This is not a casual, glib observation — it’s the basis of how homeownership actually works in the United States. Homebuyers do not weigh houses like options traders weigh equities.
They weigh:

• rent vs. ownership
• monthly carry vs. income certainty
• stability vs. volatility
• long-term wealth vs. short-term precision pricing

Critics argue that buydowns distort price. The more honest counter is that buydowns reflect what affordability means to the households actually entering ownership.

If you take buydowns away, you create fewer homeowners

There is a policy debate worth having. IPC caps exist for a reason. Forward commitments allow scale that most independent sellers could never mimic. Regulation will likely evolve — as it should.

To conclude that buydowns equal a broken market amounts to a false equivalency. So, too, is a conclusion that price cuts equal moral clarity.

The real trade-off is this:

Remove buydowns	Keep them responsibly regulated
Fewer buyers qualify	More entry buyers succeed
Builders cut production	Production remains viable
Equity erosion accelerates	Equity holds across phases
New-home pipeline contracts	New-home access continues

We should be wary of any reform that improves theoretical fairness while worsening actual access.