SF Home Sellers Incentivize Buyers With Interest Rate Buy-Downs

Mortgage interest rates may well be the headlining real estate topic of the year. To be sure, the surge that began this spring is having a very real impact on home buyers and sellers here in San Francisco.

In an attempt to curb 40-year high inflation, the Federal Open Market Committee raised has the benchmark federal funds rate a total of 2.5 percentage points since January including back-to-back 75 basis point increases this past June and July — the largest hikes since 1994. And, as a result, consumers are paying more: the average 30-year fixed mortgage rate reached nearly 6 percent earlier this summer according to Freddie Mac.

All this comes as San Francisco’s real estate market is grappling with post-pandemic realities.

› Overwhelming demand for single-family homes from early 2020 thru 2021 drove the median sales price to all-time highs. That pandemic-induced trend continued into the early part of this year when the median sales price peaked at $2,050,000 in April 2022, according to NorCal MLS Alliance data.

 

› More than 72,000 people departed the city during the pandemic leaving a glut of inventory in those neighborhoods previously teeming with young professionals, startup ventures and tech juggernauts. The vast majority of them have not returned, and large-scale layoffs are coming.

For would-be home buyers that were already on the verge of being priced out or those waiting for the deal of a lifetime, mortgage interest rates nearly doubling over the past year is not a favorable turn of events. Generally speaking, a one percentage point increase equates to a 10 percent decrease in purchasing power. That has borrowers today facing a monthly payment that is approximately 20-30 percent more compared to one year ago, all else equal.

Sellers are feeling the pain, too.

› Since the FOMC’s first rate hike in three-plus years occurring this past March, home prices have fallen. Comparing NorCal MLS Alliance sales data from April thru July 2022, the median price of single-family homes is down 18 percent to $1,680,000 (a 9.7 percent decrease year-over-year), and down 12 percent to $1,200,000 (a 0.8 percent decrease year-over-year) for Condo/TIC/Coop units.

 

› Concurrently, the average length of time to land a buyer is up 33 percent to 20 days (an 11.1 percent increase year-over-year) for single-family homes, and up 65 percent to 48 days (a 20 percent increase year-over-year) for Condo/TIC/Coop units.

Getting buyers through the door — let alone putting pen to paper — is a challenge, especially during these summer months when the pace of sales traditionally slows in even the best of times. That has sellers competing, making concessions in hope of landing a deal. To that end, slashing list prices, paying closing costs and crediting HOA dues are common strategies. And now, sellers are also taking aim directly at borrowing costs by offering credit to buy-down a purchaser’s mortgage interest rate.

The seller of this condominium at 601 Van Ness Avenue will pay one point (that’s one percent of the buyer’s loan amount) toward a buy-down. Assuming an at-list price $525,000 purchase with 20 percent down, that’s an immediate $4,200 value. If that improves the interest rate by 0.125 percentage points to 5 percent, for example, the buyer’s monthly payment will be reduced by approximately $30 — amounting to more than $10,000 over the life of a 30-year fixed rate loan.

At the brand new 88 at the Park condominium development, buyers will receive a credit up to one point as well. This limited-time promotion may be accompanied by Bank of America — a preferred lender at the project — offering borrowers an additional one-half point credit at closing. The development includes studio, one- and two-bedroom homes priced from the $500,000s.

Exactly how much it costs to buy-down the interest rate by a certain amount varies by lender and loan product. It also fluctuates daily. A 0.125 percentage point rate improvement may cost one-half point one day, and one full point the next.

From a historical perspective, the 30-year fixed mortgage interest rate today is still low. It wasn’t until the Great Recession when the FOMC cut the federal funds rate to effectively zero that interest rates dipped below 6 percent for any prolonged period. More recently, the sub-3 percent rates seen in 2020 and 2021 were the lowest rates on record going back to 1971. As they say, all good things come to an end.

Related reading: Buyer’s Market: New Developments Offering Limited-Time Incentives

Related reading: The Beginning Of A Market Shift, By The Numbers