As a tumultuous year in real estate enters the fourth quarter, I thought I would touch on a few topics that are top of mind in sales negotiations at the moment. While 2025 may bring a fresh perspective on real estate investment, the next month leading up to a major election and then the seasonally slow holiday period looks to be packed with new inventory set against a backdrop of easing interest rates and global uncertainty. Confusion and anxiety over new commission rules, the availability of homeowners insurance, the pace of interest rates declines, and the direction of home values are the current flavors of the day.
Confusion Over New Commission Rules
In simple terms, home buyers are now responsible for compensating their agents, typically a commission ranging from 2.5 – 3% of the sales price. This cost had previously been covered by the seller as part of the listing agreement that was signed with their agent’s broker. Despite the change in contractual terms, the commission to the buyer’s agent continues to be predominantly borne by the seller. This is accomplished as part of the negotiation process, whereby a buyer stipulates in their offer that the seller pay their agent’s commission. I have had three sales since August 17th when all the new changes began, two sets of buyers and one seller. In all three cases, the sellers have paid the buyer broker commission. Who ultimately bears the cost of the buyer’s agent is now a part of every home purchase contract and negotiation.
Property Insurance
Some home purchase offers now involve a contingency relating to the availability of homeowners insurance on the property. California continues to feel the impact of the exodus of “admitted” carriers due to limitations on their ability to raise prices to a level that they feel compensates them for the casualty rates from natural disasters, predominantly wildfires. The void is slowly being filled by “nonadmitted” or “surplus line” insurers who are not subject to California’s financial solvency regulation and enforcement and do not have the same limitations on how much they can charge. How this plays out in our market is twofold: we are seeing a softening of prices in homes in the heavily wooded hill areas (due to skyrocketing insurance premiums and limited insurance availability) and to a lesser degree, more escrow uncertainty as backlogged insurance agents work to obtain quotes from those few insurers who are still writing coverage. “All cash” buyers now hold an even greater advantage as they are not dependent on lenders who require proof of insurance to fund a purchase.
Additional Insurance/Lending Issues
Once you find a company willing to write a policy, your hurdles don’t end there. For older homes, it is often a non-starter if it has “knob and tube” electrical wiring, considered obsolete by today’s standards. In addition, for homes with older roofs, many insurers will only write a “cash value” policy, which does not reimburse you for the full cost of replacing the depreciated materials. Lenders are hesitant to fund loans on homes with a cash value insurance policy out of concern that their collateral would not be fully recovered in the event of a major claim. When I’m asked by a potential seller about what improvements they should consider prior to putting their home on the market, I start with the wiring and the roof. A home that is uninsurable is not marketable.
Interest Rates
Confusion over rising mortgage rates considering the federal reserve just reduced short term rates is understandable. In fact, mortgage rates went up as soon as the Fed reduced rates by 50 basis points. A discussion with any lender will help you to understand that the mortgage market is more closely associated with 10-year treasury rates that, due to their longer-term nature, are more sensitive to predictions about the future strength of the economy and inflation and not short term movements by the Fed. The general opinion of economists is that we should start to see mortgage rates gradually decline over the next year or two as worries of inflation subside and the economy remains healthy. From my perspective, the most important consideration is whether you can find a home you love, want to purchase it and can afford to do so at today’s levels. The higher interest you will pay today on a loan will pale in comparison to the higher purchase price you will likely pay by waiting for a lower interest rate environment (when there will be much greater competition for homes).
Home Prices
After falling for much of this year, prices have stabilized and trended higher in August compared to the same month in 2023. How this continues to unfold will be a result of the pace of cheaper mortgage rates, election uncertainty turning to reality, high tech employment trends and changes to the insurance market. Inventory looks robust going into this last quarter, and while many listings are experiencing price reductions and longer marketing periods, those homes in the best locations and nicely updated with minimal deferred maintenance continue to receive multiple offers and sell briskly.
From 10,000 feet, I continue to be amazed at the resilience of our local property market considering the various shocks to the system the year has experienced so far and the scope of uncertainties that lie ahead. As someone who has owned and made a living with real estate here through numerous economic cycles, I can’t think of a better time to allocate a portion of your assets into Bay Area property. The competition is lighter and the inventory is higher than I have experienced in quite some time.
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