Seller Credit or Price Reduction? Why the Credit Wins

Auto-generated captions cleaned for readability. Commercial breaks, personal catch-up and repeated housekeeping have been trimmed; licensing information appears at the bottom of this page. Debbie is joined for this episode by a real estate colleague she has worked with since 1995; the two of them have close to 60 years in the business between them.

Today's topic: the market is shifting

Welcome to Mortgage Mom Radio. I'm Debbie Marcoux and I am the Mortgage Mom, and today we're talking about transitioning from a seller's market to a buyer's market. Yes, that's correct — it is on its way, it is coming. If you're in a market across the nation where you haven't quite felt it yet, it's coming. The small tidal wave is starting to move. We're seeing markets cool from Arizona to Seattle to Las Vegas, and definitely California.

So what does that mean to you? How does it affect you if you're a seller? If you're a home buyer? What are the benefits, and what are the tips and tricks to get your home sold if you're worried it's going to take longer?

I have a guest with me today, someone I've worked with since 1995 and who has spent the majority of her career on the real estate side, where I've spent the majority of mine in mortgage. We've both done both sides, so between us there's a lot of ground covered. And I'll say up front what I always say: I'm not an attorney and I'm not a financial advisor. This is education, not advice.

The workshop moves online

Before we get into it: we were going to do a home buyer workshop this Sunday in person here at the Mortgage Mom Radio office, and we've canceled the in-person event. I'm still doing the workshop — it will be virtual, on YouTube, this Sunday, August 14th at 1 PM Pacific. It's absolutely free; anyone who paid to come in person has been refunded. We're not looking to make money on this, we're trying to get the education out.

We'll still play games and give away prizes. Give yourself about three hours, because that's what it takes to go start to finish: what do all these words mean, loan programs, closing costs, what a closing disclosure is, when you get your keys, how you choose the right real estate agent. And it's interactive — if I say something you don't understand, ask right in the feed.

What a seller's market actually looked like

So what's the difference between the two? In a seller's market — which is what everyone has been living in for the past couple of years — there's very little inventory, so you're less likely to find your perfect home and more likely to settle a little. The seller can get pretty much the price they're asking, because there's so little competition. The seller isn't paying any closing costs for you and isn't helping you out in any way. And you might be asked to remove contingencies: no appraisal contingency, no home inspection contingency.

Homes were selling before they were ever listed, just from agents talking to each other about what was coming soon. If a home did list, it got multiple offers — we saw homes taking upwards of 30 offers within a day of hitting the market. People were writing offers sight unseen just hoping to get accepted, and giving away everything to do it: over asking, appraisal waivers, no help with closing costs. Whatever the seller wants, I'll give them. That's a seller's market.

And in that market, if you were a first-time buyer with a low down payment — you needed FHA, you had 3.5% down, you wanted a condo and the complex wasn't approved — the seller wasn't going to sit around and wait for that. They'd take the offer with the bigger down payment, or the cash offer, because they were worried your financing wouldn't come through.

That's a real problem, because these markets are expensive. Seattle is expensive, Las Vegas is expensive, Lake Havasu has blown up, Los Angeles has blown up. This isn't just a California thing. For a buyer scraping together 3–5% for a down payment, coming up with another $10,000 for closing costs on top of it can be impossible — so they couldn't ask for closing costs, and they couldn't get offers accepted.

What a buyer's market looks like

The shift happens the way we're starting to see now: you notice prices dropping, you start seeing price reductions. That's your edge right there — that's the market correcting and shifting. It's usually one or the other, buyer's or seller's; in transition it can briefly be both, but rarely.

Coming into a buyer's market, sellers reduce prices and start offering incentives. You bring an offer in and ask them to help with some of your closing costs. For a first-time buyer, closing costs are your escrow fees, title fees, lender fees, appraisal fees — separate from your down payment. The seller can pay those through escrow, and it reads on the contract as a seller credit: seller to credit buyer X dollars toward closing costs. We've seen anywhere from $5,000 to $10,000 and up. That can get a buyer into a home they couldn't get into before.

Along with the price reductions, the incentives are back. Sellers no longer mind that your appraisal contingency is in there. They no longer mind your inspection contingency. If the inspection turns up broken air conditioning and you want it fixed — before, they'd have canceled and moved to the next buyer. Now they're inclined to help. And when price reductions alone aren't moving the property, you start seeing sellers buy the rate down for the buyer.

Inventory: what “normal” is

I've been reading articles all week, and inventory has doubled if not tripled depending on the market. People hear this and think the world is falling apart, property values are going to drop through the floor, we're going to crash. We are not going to crash. Let me give you the numbers.

A normal market is one where a home takes about 90 days to sell. That's what we've seen throughout history, other than during a major crash like 2007 and 2008, when foreclosures and inventory pushed it far beyond that. If the historical average time to sell is 90 days, then a normal market has to carry about 90 days' worth of inventory.

Right before this, we had roughly 12 days of inventory at the absolute craziest point. That is nothing. What you have grown accustomed to, what you've been feeling and experiencing, is not the norm. Right now we're at about a 45-day inventory — every market's a little different, some may be at 60. We are still not at a normal 90-day market.

Price reductions, and the forecast

Why are sellers sitting longer? Because they expected to list, get multiple offers, and not budge on price. They were used to the most recent comp in the neighborhood and listing above it, hoping to be the next highest sale. So they list high, sit for about 30 days, and realize they have to come down to where the last one actually sold. Hence the price reductions.

Somebody asked me what I think happens with real estate and where interest rates go — whether we see a big decline. I've said I didn't think we'd see it in 2022; I thought it would be 2023, maybe even 2024, before things leveled off. One of the articles I read this week is predicting that by mid-2023 property values taper off, with about a 5% decline expected.

I've given you statistics before. I've run the payments and shown you the difference between buying today at today's interest rates versus buying next year at a value that's 10% lower but a higher interest rate — and it was still cheaper monthly to have bought now. So if you can, as a buyer, take advantage of the interest rates we have today rather than where they'll be a year from now, and go in and ask the seller for closing costs, and negotiate a little on price, you're getting a genuinely good deal. It's time to pounce.

Sellers: offer incentives instead of cutting the price

And for sellers who've been sitting on the market 30 days trying to figure out how to get noticed: offer an incentive. Offer to help that first-time buyer. Offer to help the veteran who has a zero-down loan but doesn't have the extra 2% for closing costs. Offer two to three percent to your buyer — first to buy their rate down, so they get a lower interest rate than they could get on their own. That helps them qualify, it helps them be comfortable in your home, and it gets them the cash they need. It is easier to finance $10,000 than to come up with $10,000 in cash.

Something we used to see back in the mid-90s: seller will give paint and carpet credit. That's worth remembering now. Buyers have to come up with a down payment in an economy where everything is more expensive — and then the home needs carpet, or paint, or the appliances need replacing, or the AC is working well enough today but won't be for long. Go out of the gate offering those credits. If I'm a buyer who can barely scrape together the down payment and I have a seller willing to help me, I am willing to pay more for that home, and I'll consider your house even if it wasn't my favorite.

Why a credit beats a price cut

Here's the math, and I like round numbers. Say you have a $700,000 house. If you reduce the price by $10,000, you're at $690,000 — and for that borrower, qualifying is pretty much the same. But if you offer that buyer $10,000 toward their credit or closing costs, that's what gets them into your house. They weren't having a problem qualifying. They were having a problem with the money.

At the end of the day you net the same. If the last comparable home sold at $700,000 and you give somebody $10,000 in incentive, you're netting $690,000 — no different from a price reduction to $690,000. But that $10,000 is money the buyer didn't have to bring in cash.

And to be clear, I'm not saying closing costs are $10,000. Closing costs are based on the sales price; title fees, escrow costs and everything else change with the price. That's just an easy round number. On average closing costs run about one and a half to two percent of the sales price, and across the West Coast markets we're on — Las Vegas, Lake Havasu, Seattle, Los Angeles — the average home price is somewhere around $600,000 to $700,000. That's why the $10,000 example is in the right neighborhood.

FHA and VA condos, and spot approval

Let's talk about FHA, because I love FHA loans. For a long time, if you were an FHA buyer in a condo price range, it was difficult to get an offer accepted when the complex wasn't already FHA approved.

Here's what buyers don't understand: to do an FHA or VA loan on a condominium or townhome, that association has to be approved by FHA or VA. If it isn't, we can't do those loans there. So agents have to bring conventional offers only, which makes it harder on the seller — you're cutting out two loan programs.

But we can make that easier. FHA has what's called a spot approval, where we approve one unit at a time rather than the entire complex, and that piece takes about ten days. So it's about ten days longer to sell your condo — and ten days is better than sitting on the market waiting for a conventional buyer when you have an FHA buyer who is ready, willing and able right now.

VA doesn't have a spot approval process; there we'd have to get the complex fully approved. That's something our team has been doing for years and is good at — we recently completed a VA condo approval in Los Angeles. Many lenders won't do it because it's difficult; they start and then get hung up and it never finishes. If you're an HOA president, reach out and talk to us about getting your complex fully FHA or VA approved. It helps the turnover for every owner in the complex.

And to the buyers who've been told a hundred times “it has to be FHA approved or I can't show it to you” — get a different agent. As a seller, your agent should know right off the bat whether your property is FHA and VA approved, and if it isn't, don't let them tell you that you can't take FHA or VA offers. That's not true. Call us, we'll get the complex approved, and you get a much bigger pool of buyers, which is likely to net you a higher price.

Rate news: why rates improved after the hike

Now the interest rate news. You've been hearing us for a couple of years about rates going up as the Federal Reserve raised the prime rate. A couple of weeks ago I did a show ahead of the Fed's announcement, when they were planning to increase by three quarters of a point, and I said on air: the three-quarter-point move is already built into the rate sheets. If it comes in higher than three quarters we might see rates go up; if it comes in lower we might see them go down. I didn't expect a huge change from the result itself.

What actually happened is they raised it by exactly three quarters — not a full point. And what we saw was interest rates come down. We improved by about a quarter of a percent, maybe three-eighths, 0.375. That's significant when you're moving from the fives to the high fours.

Why? Because I'd also said we'd see home equity lines of credit go up, credit cards go up, and short-term loans like auto and student loans go up. What investors did was put money into longer-term bonds and longer-term mortgages — and that gave us the improvement.

So if you talked to us two weeks ago about an FHA loan with a decent credit score, that rate might have been 5.25% or 5.5%. Today we're maybe at 4.75% to 5%. That's a real difference in how much you qualify for and what your monthly payment is. Now we're hoping things stabilize until the next announcement moves the needle again.

Cash-out refinancing and blending in a HELOC

Who does that improvement help? Buyers, obviously. But also people looking to take cash out of their home — for home improvements, to buy out a co-owner, to pay off debts, to build a pool or an addition — who have a rate around three and a half percent from the last couple of years.

Here's the problem with a home equity line of credit. We write them, and we're happy to if that's what you need. But those lines keep going up with the Federal Reserve prime rate. The balance goes up, the minimum payment goes up, and you're not paying anything down because the payment is interest only. After ten years it either turns into a mortgage or comes due in full — you have to refinance it anyway.

So when we take a blended rate: if your equity line is at 9%, 10% or 12% and we blend it with a three-and-a-half percent first mortgage of $400,000 or $500,000, you might land at a blended rate of four and a quarter, four and a half, four and three quarters. If you can do a refinance that pulls the cash out and puts it all on one 30-year fixed note, that may well be the way to go, and it's the healthiest way to go — you're not worrying about the payment changing.

Why the window may not stay open

Why do it now rather than next year? Set the rate forecast aside and pretend rates don't change at all. We just talked about statistics anticipating property values flattening, possibly down five percent at most, according to the experts I'm reading.

If your value goes down, you may not have the opportunity to consolidate. You may not have the opportunity to pull out the cash. Because the thing that determines how much cash you can take is the value of your home. And on a cash-out refinance we can't go above 80% of value unless you're a veteran — veterans we can help at a higher loan-to-value all day long.

So picture it: you have a first mortgage and a second — a home equity loan or line. The prime rate is rising, the line's payment is screaming up, and maybe your balloon is coming due and you have to pay it off. If your property value drops, we may not have the equity to pay that second off. And if the balloon comes due and you can't refinance it, you're stuck with the higher rate and the higher payment, or with a note due that you have no way to pay back.

Cooling markets, and what it doesn't mean

I have articles printed out here from two days ago: Seattle housing market cooling down. Las Vegas cooling down. California cooling down. Lake Havasu cooling down. Every market we're on the radio in is cooling down.

Cooling down doesn't mean values are dropping crazily. It doesn't mean the rug gets pulled out from under us and we crash. It means we're getting back to normal territory — normal time frames, normal inventory levels, an inventory that lasts about 90 days.

So sellers, get ahead of it. Start offering buyers an incentive to get into your home; make your home more attractive. And buyers, take advantage: sellers are sitting longer, there is more opportunity for you, and we've had a nice dip in rates over the last couple of weeks. Learn what you need to do, get pre-approved, and start shopping.

Wrap-up

If you have any questions, call us at 844-935-3634 — 844-WE-LEND-4. We're working in all the markets we've talked about: Arizona, Las Vegas, Washington, California and more — almost 14 states at this point; we just added Missouri. If you've been thinking about selling, or relocating to another state, it's much easier to deal with one lender who can help you where you're going. And if we qualify you for California and you decide on Nevada or Arizona, that qualification goes with you as long as we're licensed there.

Text the word MOM to 844-935-3634 to know when we go live, and I'll see you Sunday the 14th at 1 PM on my YouTube channel for the home buyer workshop. We'll be back again next week.