If you’ve been on the hunt for a house in the past year you know how brutal it is out there. After the initial slow down in real estate deals from the COVID-19 pandemic subsided, homebuyer demand quickly skyrocketed. To the frustration of buyers, the inventory has remained stagnant, and bidding wars are driving up the prices.
Take a look at the most recent statistics on homebuying released by the National Association of Realtors and Redfin. The competition and data are jaw-dropping.
Homes are selling more quickly and for higher prices
99% of all metro areas that the National Association of Realtors tracks recorded year-over-year price increases in the first quarter of 2021 according to a report released in May.
Most expensive areas have seen double-digit growth. San Jose led with a median home price of $1.5 million, up 11.1%, followed by San Francisco with $1.2 million, up 21.8%. Naples, Florida also made the list with an increase of 24.9%, resulting in a median price of $599,500.
A new report from Redfin, highlighted some unbelievable record-breaking metrics.
- Half of the homes sold for more than their listing price, up 23% from the same time last year.
- Home prices rose to $352,975, up 24% over last year, and the asking price was also at a record high of $358,975.
- Homes sat on the market for a record low of just 17 days. Last year, that number was 18 days.
All these numbers mean buyers across the country are facing stiff competition, and the hottest real estate markets aren’t expected to slow down anytime soon.
Even as businesses plan to reopen their doors as more workers get vaccinated, it’s unlikely that the remote work trend driving homebuyer demand in new areas will stop completely. In fact, one survey showed that 58% of remote workers would quit if their company asked them to return to the office. While some may be forced back into their cubicles, local home shoppers will still face affordability issues in their smaller towns driven by out-of-towners with bigger budgets.
Home prices are pushed higher due to lumber shortage
At the onset of the pandemic, the supply chain of several goods was disrupted, and there was a sudden increase in demand for others. Toilet paper, hand sanitizer, laptops, and home gym equipment were quickly snatched up and heavily sought after.
Today, there is a shortage of lumber, which means construction costs have increased, making housing even more expensive.
Several key factors are contributing to the climb of lumber costs:
- The housing market rebounded from the pandemic much more quickly than expected.
- Homeowners are taking on more home improvement projects.
- The lingering effects of the Great Recession and early pandemic precautions slowed down production in the United States.
- International tariffs are adding to the costs.
The price fluctuations and shortages are leading to delays in building and selling new homes. While Builders’ confidence in the single-family market is holding steady, according to the National Association of Homebuilders, “some builders are slowing sales to manage their own supply chains.” Housing starts actually decreased by 9.5% in April.
Like other sellers on the market, builders are trying to get the highest bid possible. Companies like D.R. Horton Inc. and Lennar Corp. are setting up blind auctions in areas with a high influx of homebuyers migrating out of larger cities like Texas, Florida, and Southern California. Because future costs are uncertain, many are adding escalation clauses into contracts and limiting the number of contracted projects.
Stay calm and don’t panic buy
A CNN business article points out that an increase in home prices isn’t unique to the United States. According to one study on 37 countries belonging to the Organization for Economic Cooperation and Development, prices rose by an average of 6.7% between Q4 2019 and Q4 2020. That’s the fastest year-over-year growth in 20 years.
Homebuyers around the world are panicking to get their offers accepted and making rash decisions in the process. Sometimes the risks pay off.
Most homes receive more than one offer
Almost 75% of houses faced a bidding war in April. The low inventory of homes for sale means that buyers in every neighborhood are likely to go up against one another. Many are expressing frustration about being locked out of the market by those making cash offers over list price. Buyers are taking greater risks and waiving contingencies like the right to walk away from the contract without financial consequences if the home doesn’t pass an inspection or appraise for the offer price.
While these strategies may help buyers finally nab a home, the potential risks need to be weighed carefully. The extra cash to make repairs or cover the gap in an appraisal will come out of their pocket.
Caution on writing “love letters” to the seller
A popular ploy to appeal to the emotions of a seller and win the house is to write a “love letter” explaining why the buyer fell in love with the house and how they plan to live there. It’s an attempt to stand out and tug at the heartstrings, but guidance issued by the National Association of Realtors says it raises concerns about fair housing.
Personal information within the letter can reveal characteristics about the buyer like race, religion, and family status, creating a known or unconscious bias against the buyer. According to the NAR, “using protected characteristics as a basis to accept or reject an offer, as opposed to the price and terms would violate the Fair Housing Act.”
Real estate agents are advised to caution their clients on the downfall of these letters and inform sellers that offers should be accepted based on objective criteria.
Despite this warning from the NAR, many buyers still roll the dice and write them, but there are other ways to victory as a homebuyer.
Some buyers may want to consider looking just beyond their ideal location or take a second look at homes that aren’t turnkey. Others are sweetening their deals by making unique offers to accommodate the seller as they become the buyer later. One couple in New Jersey offered the sellers of a home they purchased a free stay at their rental property. Another buyer made a deal to allow the sellers of the property to stay in the guest house for a few months during their house hunt.
Homebuyers should be prepared for disappointment and tough decisions, but it’s not all doom and gloom. In light of lumber shortages, U.S. Trade Representative Katherin Tai is planning to meet with Canadian and Mexican representatives to discuss cuts to the tariffs, mortgage rates are still relatively low compared to previous years, and the Biden homebuyer tax credit has been introduced as a bill. Hopefully, as conditions improve, more homebuyers will become homeowners.
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