Seller Subsidies:Financial Incentives Help To Sell Homes Faster
In the sellers’ market of 2004, 2005 and early 2006, seller subsidies or seller contributions were often unnecessary. As the Northern Virginia housing market returns to a more balanced market, seller concessions are offered in an increasing share of transactions.
Seller subsidies can include help with closing costs, decorator allowances and other up front cash offered from the seller to the buyer. Sellers offer subsidies to attract buyers and reduce the time their property sits on the market without reducing the list price. Often, a $5,000 subsidy can mean more to a buyer than a $10,000 price reduction. According to MRIS data, sellers’ contributions totaled about 2 percent of the sales price during the past six years.
Recent Trends
Figure 1 shows the total monthly sales and sales involving a seller subsidy from January 1999 through January 2007. Beginning in 2001, while the trend in total sales continued to be cyclical—rising in the summer months and falling in the winter months—the number of seller-subsidized sales remained constant during the year. This means that sellers listing their homes in winter months were more likely to have offered a subsidy to buyers.
The chart also shows a dramatic increase in the share of sales with a seller subsidy beginning in mid-2005. Between 1999 and June 2005, about 35 percent of sales of existing homes in Northern Virginia were accompanied by a seller subsidy. From July 2005 through January 2007, 50 percent of sales had one.
In fact, in the last six months, seller-subsidized sales have made up 60 percent of sales in the NVAR region. The increasing rate of seller contributions reflects the recent adjustment within the regional housing market. As the market returns to more of a balance between sellers and buyers, seller contributions will remain an important part of market transactions.
Contributing Factors
Across the Northern Virginia region, sellers were slightly more likely to have offered a subsidy in Fairfax County and the City of Fairfax. For example, during the past three months (November, December and January or “Winter 2006-2007”) 67 percent of sales in Fairfax County and 70 percent of sales in the City of Fairfax had a seller subsidy. In contrast, the shares of sales with a seller contribution were 60 percent in the City of Alexandria and 51 percent in Arlington County. These data suggest that location is important in determining whether or not sellers are offering subsidies in the current market.
Home type and sales price are the two other factors strongly associated with the prevalence of seller subsidies. During the past three months, seller subsidies were mostly offered with sales of single-family attached homes or townhouses. In the NVAR region, nearly 72 percent of sales of single-family attached homes had a seller subsidy, compared with 64 percent of condominiums and 58 percent of single-family detached homes (See Figure 2).
Homes priced below $400,000 were also more likely to have been sold with a seller contribution in November, December and January. In fact, nearly three-quarters of these homes had a seller subsidy, compared with 65 percent of homes priced between $400,000 and $699,999 (See Figure 3). The most expensive properties—those sold for $700,000 or more—were usually sold without a subsidy from the seller. Only 38 percent of these higher-priced homes that sold this winter had a seller subsidy.
The seller subsidies offered can mask the larger trends in home price appreciation or depreciation. For example, according to MRIS data, the average sales price of an existing home in the NVAR region dropped by 0.2 percent from January 2006 to January 2007. If we calculate the change in price based on the “net price”—that is, the sales price minus the seller subsidy— over the same period, prices dropped by 0.7 percent.
Will Subsidies Continue?
What does this increase in seller subsidies mean? First, seller contributions are going to be increasingly common during the next few months as the market continues its evolution into more of a buyers’ market. Rather than drop the prices or let their homes linger on the market, sellers will offer subsidies to
attract buyers.
Sellers should realize that seller contributions have typically accompanied about a third of home sales regionally throughout all phases of the market. Second, the location and asking price of the home all influence whether a home sells with or without a seller contribution. Homes in the closer-in jurisdictions of Alexandria and Arlington are somewhat less likely to sell with a subsidy. Single-family detached homes and more expensive homes are also less likely to need seller contributions.
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Information deemed to be reliable, but not guaranteed.
By Lisa A. Fowler, Ph.D., GMU Center for Regional Analysis