NOTE TO SELLERS: IT'S NOT MAGIC, BUT THERE IS A TRICK TO INCREASING DEMAND FOR YOUR HOME
In a recent survey of prospective homebuyers, nearly half (47 percent) said they would buy if the rate for a 30-year fixed-rate mortgage dropped to 5.5 percent or lower. That compares to just 13 percent who would be content with 6.99 percent or lower (as of Oct. 31, the average rate was 6.72 percent, according to the Federal Reserve Bank of St. Louis).
In short, if the rate dropped to 5.5 percent, the pool of potential buyers would deepen dramatically. It’s considered the “magic mortgage rate” – the point at which buyers are more willing to give up the low rate they currently possess on their existing home and move for something new.
While sellers can’t waive a wand to reduce mortgage rates, there is a proven way to increase the number of buyers who can afford your home – and without slashing the list price. It’s a tactic that homebuilding companies have been using with great success to keep their inventory in demand.
By making financial concessions at the closing, you can help the buyer “buy down” their effective interest rate – and get closer to the “magic” 5.5 percent rate (see accompanying graphic).
Here’s a scenario for how it would work:
If you’re listing your home for $600,000, you can contribute $18,000 (3 percent of the price) at closing – which cuts 125 basis points (1.25 percent) off the buyer’s mortgage rate. That means you can take the interest rate from 6.72 percent to 5.47 percent, which then lowers the buyer’s monthly payment.
An alternative tactic for creating a similar level of affordability is to drop the list price of the home upfront, which could ultimately cost the seller approximately twice as much!
For sellers, the message is this: You don’t need to wait for interest rates to drop to attract buyers. The more financial concessions you’re willing to offer, the more buyers you can attract to your home.
Source: The Group Insider December 2024
