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Are Home Seller Concessions Artificially Boosting Home Prices?

Do home sales appear more stable than they really are?

Home sale concessions are a powerful tool in the arsenal of the home seller. This tactic is frequently used during a “buyers’ market.” More recently, many home sale transactions have started to include “goodies” offered by the seller to sweeten the deal for the homebuyer. Because the housing market experienced its weakest year since 2014 due to rising mortgage rates, record home prices in 2022 and the threat of a “perilously close” recession (as the World Bank warned), homebuyers can ask for a lot more from the seller and buyers are getting it.

Sellers Are Giving Substantial Concessions to Homebuyers

According to a new report from Redfin, home sellers gave concessions to buyers in 41.9% of home sales in the fourth quarter. This is the highest share of any three months in Redfin’s tracking real estate concessions records.

That number has soared from approximately 30% in the previous quarter and outpaces the prior 40.8% high from the three months ending July 2020, when the housing market nearly ground to a halt due to the onset of the COVID-19 pandemic.

NAR Chief Economist Lawrence Yun said, “Markets in roughly half of the country are likely to offer potential buyers discounted prices compared to last year.” But, discounted prices are not the only concession. Not by a long shot.

Concession “Goodies” Can Be More than Simply Closing Costs

Beyond closing cost assistance, sellers are offering money to cover the cost of home repairs and even warranties on household appliances. Beyond that, a resurgence of “mortgage rate buydowns” has grown in recent months.

Today’s homebuyers feel more empowered during negotiations as their offer is often the only one available to the seller. Buyers are well aware of how much equity homeowners gained during the pandemic and know sellers can afford to give sizable concessions beyond the price reduction. Sellers are more open to negotiating as they adjust to a much less competitive market. They know they will not get thousands of dollars over the asking price like their neighbor did last year. At least not for a while.

In This Market, Sellers Need to Stand Out to Attract Homebuyers

With data like the above, there is no doubt that sellers need to stand out to attract buyers. In December, housing inventory was approximately 970,000 units, which is down 13.4% from November. But this is up a substantial 10.2% from last year (880,000).

Rising mortgage rates and home prices have made seller concessions come back swiftly. As looming inflation and economic uncertainty have dampened home buying demand, the buyers who remain in the market have found increased negotiating power.

Despite Higher Mortgage Rates, Days that a Home Is on the Market Is Less than One-Month, for Now

Properties typically remained on the market for 26 days, up from 24 days in November, and 57% of homes sold were on the market for less than a month. Does this mean that concessions are keeping home sales moving? And without those concessions, would we see sales decline, pulled downward by other market forces that are dampening activity?

It’s impossible to calculate how large a roll seller concessions are playing in the market, and what would happen without them. Concessions exist as a tool to combat other factors impeding home sales, and sellers are using them to their advantage. Would the market be worse off without them? Without a doubt.