Incentives Keep Housing Prices Falsely Stable

I didn’t know that this happened, but I’m not particularly surprised that it does, but whatever the house sells for is what is listed on the paperwork and doesn’t necessarily reflect the thousands of dollars of concessions that the seller may be offering. If you’ve been following any business related news lately you’ve certainly heard of the falling of interest rates and the slowing of the housing market but it wasn’t until today, when I read about “buy-downs” that I realized the sell price has nothing to do with the actual sell price.

In a “3-2-1 buydown,” the home seller, usually a home builder, helps with the payments such that the interest rate effectively is lowered by 3% in the first year, 2% in the second, 1% in the third, and none thereafter. Here’s a real-life example:

The house cost $224,900. With a 20 percent down payment, the mortgage principal would be $179,920 and the monthly mortgage payment would be $1,049 a month, assuming a 30-year loan fixed at 7 percent. The buy-down would lower that to $749 the first year and $900 the second year. The incentive cost the seller $5,397.60 at closing.

This shouldn’t be much of a shocker considering sellers often help buyers out with closing costs, which can easily run into the $5,000s, but I guess I never really thought about how the “sale price” is really just a lie. (somewhere, in the back of my mind, I think I realized this before once but I can’t seem to find a post about it…)

If you’re buying a house now, try to get every deal you can… you have all the cards, the sellers just don’t know it yet.

Source: CNN Money