Seller incentives aren’t cutting it as homebuyers struggle with affordability
Many sellers are offering credit for repairs as a top concession to close a deal, but buyers want help with financing.
Seller concessions are popping up in home listings across the country, but the offerings alone aren’t enough to lure in cash-strapped buyers.
More than three-quarters of agents surveyed by Bright MLS said their buyers stopped or paused their home search in the past six months, with 67% citing elevated mortgage rates as their top reason for exiting the market. Another 56% said the lack of available homes in their price range was a reason for bowing out, and some 53% said they weren’t able to compete with cash offers.
The snapshot underscored the inability of buyers to keep up with current market conditions — even as some sellers are resorting back to concessions.
At least a third of all sales transactions in January included a concession, according to the study, which drew from responses of 852 real estate agents in the mid-Atlantic region. Yet most buyers remain on the fence — a trend, some experts say, that may bleed into this spring.
"Even with more concessions in the market, sellers still have the upper hand because inventory remains so low," Bright MLS chief economist Lisa Sturtevant, told Yahoo Finance. "Sellers are willing to offer cash for repairs and home inspection items, but so far, according to our survey, we have not seen a lot of sellers coming to the table with offers to buy down rates."
Read more: 5 strategies to get the lowest mortgage rates in 2024
'Buyers sacrifice in just about every category'
Nearly 2 in 5 sellers offered credit necessary for repairs revealed at a home inspection, according to Bright MLS. The second most popular concession reported among listing agents was closing cost assistance, with 30% offering that help. Other popular incentives included rent back from a buyer and home warranty assistance.
But those incentives may be missing the mark during a time when affordability is so fragile for many buyers.
Less than 4% of home sellers offered to buy down the mortgage rate — the heaviest burden for most buyers. Meanwhile, just 9% of sellers lowered their home price after a low appraisal.
"Both can impact the monthly payment, which is likely top of mind for buyers," Bright MLS researchers wrote.
With a seller-paid rate buydown, the seller will pay a fee at closing toward mortgage discount points to reduce a buyer’s rate. Each discount point is equal to 1% of the loan amount, and each point knocks off .25% off the initial rate.
Read more: Should you pay for mortgage discount points? 4 tips on how to decide.
So, for instance, if a seller offers to purchase two discount points on a $300,000 loan, they would have to pay $6,000 at closing. A buyer quoted an initial rate of 7% would see their rate reduced to 6.50%.
For a seller, buying down a rate is just a small portion of their profit. But for buyers, every penny counts. And climbing rates are again adding pressure on buyers trying to enter, or re-enter, the market.
The popular 30-year fixed-rate mortgage increased to 6.94% during the week ending Feb. 29, marking its fourth consecutive weekly increase and highest point so far this year. That, in combination with elevated home prices — which surpassed wage growth for the first time in 14 months in January — have forced would-be buyers to make sacrifices.
"Many buyers will purchase outside of their desired location," Jeff Reynolds, real estate broker at Compass and founder of Urban Condo Spaces, told Yahoo Finance. "They will often add to their commute time, end up in a less desirable neighborhood and at times even enter a school district with less accolades because…..price matters most."
According to the National Association of Realtors, the median price of a previously owned home was $379,100, the highest for the month of January on record.
A buyer with a credit score between 700-719 entering a 30-year fixed loan at 6.94%, for instance, would be facing a $2,507 monthly mortgage payment. After taxes and fees, that figure would increase to roughly $3,139.
Buyers are even sacrificing on basics like space.
"They will forego a den for an office when they can choose a condo project with a co-working space," Reynolds said. "They will buy in a condo with an amazing rooftop deck when they can’t afford a unit with its own deck or outside patio space."
Reynolds added: "Bottom line is, affordability is an issue. I see buyers having to sacrifice in just about every category."
Least help at the low end
The most affordable homes — those priced under $300,000 – remain elusive, while the few available on the market are less likely to offer concessions.
According to Bright MLS, sellers of homes priced under $300,000 were the least likely to offer concessions. Just 24% offered buyers some sort of concession in 2023.
By contrast, sellers of mid-priced homes were more likely to offer concessions last year. Some 30% of homes priced between $300,000 and $499,999 had a seller offer a concession. Meanwhile, 27% of sellers of homes priced between $500,000 and $799,999 offered some type of perks to close a deal.
Though rate buydowns remain the least common concession out there, some sellers are bringing it to the table to close a deal.
"I just helped a seller of a condo in South Lake Union in Seattle," Reynolds told Yahoo Finance. "The buyer for the property could only purchase if my seller participated in a 3-2-1 buydown. So my seller gave the buyer $15,000 toward loan/interest rate buydowns."
That 3-2-1 buydown will last three years. Under this scenario, the starting rate is reduced 3% the first year, 2% during the second, and 1% in the third year. At the end of the period, the rate will return to the initial rate the buyer was quoted.
"This allowed that buyer to choose our unit over something else," he noted.
'We will see more concessions to buy down rates'
With inventory of previously owned homes still in short supply, more and more buyers have been turning to new homes in search of financing perks.
In 2023, some 38% of builders said they built smaller homes to help support home sales to bridge the gap in housing affordability. Another 24% said they planned to build even smaller in 2024, the National Association of Home Builders said.
Overall, the average size of a new home inched down from 2,479 square feet in 2022 to 2,411 square feet in 2023 — the smallest size in 13 years. The change allowed home prices on new homes to drop to $427,400 last year, down 7 points from the previous year.
Still, builders are aware that buyers need more financial assistance.
In February, 25% of builders said they offered a price reduction, down from 31% in January and 36% in the last two months of 2023. Some 58% offered sales incentives, with temporary rate buydowns still a popular concession.
For instance, Toll Brothers (TOL) is still offering a 3-2-1 buydown program of select quick move-in homes with rates as low as 3.99% for the first year.
"I think we will start to see more sellers offering concessions to allow buyers to buy down their mortgage rate, and this will be particularly true in markets where there is a lot of new construction," Sturtevant said.
Gabriella Cruz-Martinez is a personal finance and housing reporter at Yahoo Finance. Follow her on X @__gabriellacruz.