- Truth About Home Prices

Seller Incentives Skewing Numbers
Sunday, February 17, 2008

It's common and perfectly legal — homeowners give buyers cash back at closing to cover expenses such as closing costs, mortgage payments, taxes or even home improvements.

Take, for example, a recent home sale on Rosemont Avenue in Bristol. Agent Charlie Kaylor said the three-bedroom, ranch-style house sold for $193,000, but the sellers gave the buyer $5,000 at closing. The price was recorded as $193,000 — that is what the buyer paid — although the true sales price after the cash giveback was really $188,000.

Such givebacks, along with throw-ins such as sellers paying for new roofs and driveways, are a sign that it's a buyer's marketBut they're also artificially propping up home sales prices, which helps explain an economic oddity that Connecticut is seeing these days: The median price of homes keeps rising in the midst of a housing slowdown, as the number of homes sold each month keeps dropping and the number of homes for sale is creeping up.

The artificial prop-up means that the downturn in Connecticut's real estate market, and that of the rest of the nation, is deeper than it appears.

"It's a big deal because prices are, in fact, falling; we know they are falling, but that is not reflected in the numbers we see," said Ron Van Winkle, a West Hartford economist and town official.

It's impossible to tell how much seller incentives and givebacks affect those numbers. But cash givebacks of even $2,000 to $5,000, if they are typical across the board, could skew the overall sales price data by 1 to 3 percent.

That small margin means Connecticut's median sales prices actually are flat or falling — not rising, as the data have shown.

A recent report from the Greater Hartford Association of Realtors said sales of single-family homes in the region dropped 34 percent, from 831 in December 2006 to 550 in December 2007. At the same time, the median sales price of single-family houses increased 2 percent, from $250,000 to $254,000.

Another factor that can skew the data is simply that more expensive homes are selling. For example, if Fairfield County records a gain in the number of $1 million-plus houses on the market, the whole state median rises.

But cash givebacks, upgrades and improvements are, by many accounts, growing as a factor in bending the data. Late last year, a newly constructed home sold in Granby for $550,000, but the buyers received $25,000 in upgrades they wouldn't have gotten in a better market two years ago, including granite counters, upgraded appliances and hardwood flooring.

When the home sale was completed, the final sales price recorded was $550,000. But the $25,000 in upgrades given to the buyers wasn't recorded. In reality, the sales price of the house was $525,000.

"Instead of knocking down the price, they got the house they really wanted with the upgrades," said Kaylor, the agent RE/MAX Advantage in Avon, who represented the buyers on the deal.

Almost unheard of a decade ago, cash givebacks have become common — one Middletown agent estimated that half of all his home sales have some sort of seller incentive that doesn't show up in the final sales price — especially in a slowing market where homeowners are more willing to negotiate in order to sell their homes.

The advantage to buyers is that they can take out a slightly larger mortgage, based on the recorded sale price, leaving them with more money in hand. Givebacks are especially attractive to buyers who are scraping together enough money for a down payment, closing and moving costs, and for renovations or upgrades to their new homes.

And sellers like givebacks because they help lure in a buyer without dramatically reducing asking prices.

"There's no question that if sellers are giving something, even if that doesn't show up in the final sales price, it is still from the buyer's perspective a price reduction," said Lawrence White, an economics professor at the Stern School of Business at New York University. "But in terms of what is going to get reported in the sales price data, that isn't going to show up. Which means the sales prices are softer than the data are telling us."

The seller incentives have become so common that the multiple listing service, where real estate agents list and track home sales data, now has an entry line for seller concessions. For instance, in the last four months of 2007, 35 of the 191 homes that sold in West Hartford had seller concessions. (Agents, though, said that number is probably higher because there is no requirement that incentives and concessions be listed).

"It's very common, especially among first-time home buyers and any buyer who doesn't have a lot of cash in hand," said Tom Abbate, an agent with William Raveis Real Estate. "Buyers like to walk away from a closing and still have cash in their pocket."

The givebacks are legal, as long as they are disclosed to lenders. They become sticky if the sales price of the home, with givebacks, exceeds the true value of the home as determined by an appraiser.