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New data from Redfin shows that seller concessions, such as mortgage rate buydowns and cash credits for repairs and closing costs, are becoming increasingly common as high mortgage rates curb demand for homes. This may be keeping housing prices artificially elevated while the actual cost of buying a home falls—the Case-Shiller Index has been modestly declining since July, but the situation could be worse than it looks for sellers.
Concessions were popular before the pandemic, but at the peak of the homebuying frenzy, sellers had all the power. Buyers pounced when new homes hit the market, sometimes offering to waive the inspection, while sellers fielded multiple over-asking offers and asked buyers to cover appraisal gaps. Now, as buyers pull back due to affordability concerns, homes are sitting on the market longer. It’s sellers who are looking desperate, while buyers expect to be persuaded.
How Common Are Seller Concessions?
In the fourth quarter of 2022, 41.9% of home sales involved concessions, a record high since Redfin began tracking concessions in July 2020. It even surpasses the portion of homes that sold with concessions during the three-month period ending in July 2020, when homebuying activity hit a wall due to the onset of the pandemic. And it’s a significant increase from the trough. Between April 2021 and September 2022, sellers offered concessions in only about one-quarter to one-third of home transactions.
The data comes from buyer agents across the nation, who reported to Redfin when a seller offered something to reduce the buyer’s total purchasing cost. Cash credits for repairs, discounts on closing costs, and offers to buy down the mortgage rate were all considered concessions. Lowering the listing price was not considered a concession—but some sellers had to reduce their listing price or accept offers under-asking in addition to offering concessions.
In fact, in 11% of home sales, sellers dropped the price, offered a concession, and still sold below asking. 19% of home sales had a concession and a price drop, and 22% of homes sold below asking even with a concession.
Which Markets Are Most Impacted?
In San Diego, California, sellers offered concessions to buyers in 73% of home sales in Q4, an increase of more than 20 percentage points year-over-year. Phoenix and Seattle saw the biggest increase in the share of transactions involving concessions, exhibiting 29.7 percentage points and 25.6 percentage points, respectively.
This is consistent with predictions from Redfin, Moody’s Analytics, and other analysts, which suggest the markets that experienced the most rapid increases in home values during the pandemic will be the most vulnerable to price declines. Concessions are becoming more popular in many of the cities that are expected to have the steepest corrections, including Phoenix and Seattle, where home prices have begun cooling—but there are outliers.
For example, concessions have become slightly less popular in Austin, Texas. About one-third of home sales in Austin involved concessions in the fourth quarter of 2022, down from 38.1% the year prior. The trend of concessions concealing an actual decline in the cost of housing transactions may not be occurring there—but sale prices in the Austin market are cooling faster than in many other metros.
Metros Where Most Home Sales Now Involve Concessions
Metros Where Concessions Have Increased the Most
How Can Investors Benefit?
If you asked a seller for concessions in the summer of 2021, you might have been laughed out the door. But it’s no longer unreasonable to expect mortgage-rate buydowns, warranties on home appliances, and cash credits for repairs or closing costs, even if you’re making an offer that’s less than asking. Keep in mind that homeowners made vast equity gains over the last two years—many are in the situation to be able to fund concessions without losing money on their homes. And the more you can reduce the cost of the transaction through concessions, the more you can increase your return.
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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.
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