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Why Home Buyers Are Struggling In This Ultra-Competitive Landscape

By Mike Maher| Contributor | Real Estate

First-time homebuyers and seasoned homebuyers alike are finding themselves frustrated when they bid over the asking price, without concessions, only to be declined over and over.

“Why are we getting outbid?” It’s the question on a lot of would-be homebuyers’ lips right now, and there are a few different factors at play.

The current state of the housing market

Image by Liza Summer

Although it may feel like another housing bubble, the issues plaguing the market today are far different. In 2008, the housing market crash was precipitated by questionable mortgage practices and home builders churning out more homes than the market could absorb.

Today, that equation is flipped: lenders are only issuing mortgages to highly qualified individuals, the existing housing stock isn’t enough for a growing population, Boomers are aging in place rather than selling, and home building continues to lag behind demand. The current market conditions aren’t going away anytime soon.

Why buyers are getting outbid even with competitive offers

Although there are nuances at the local market level, it’s safe to say that the housing market in the U.S. right now is extremely competitive. Well-qualified buyers are struggling to understand why solid offers at the full asking price are no longer enough. This January, 56% of buyers faced bidding wars on their offers, according to a Redfin survey.

In order to make offers more appealing to sellers, buyers are having to go above and beyond - whether this means making an all-cash offer, an offer well above the asking price, or a no-contingency offer. And frequently, buyers are offering all three. The problem is, of course, that many buyers are limited in what they can offer. First-time homebuyers are often lucky if they can put down 20%, let alone an entire cash offer, and often have student loans and other obligations holding them back from bidding higher. Other buyers - rightly so - are wary of waiving inspection contingencies. And even if a buyer is offering over asking, in this market, it may simply not be enough. In the Philadelphia suburbs, homes in poor condition are going for 15% over asking. If the house has several really desirable features, the bids are reaching the 25% over asking range. And if a house is fully move-in ready–it's actually in decent condition, it’s clean, and everything is great–it can go for 35 to 50% over the asking price.

Historically low mortgage rates have been adding fuel to the fire. Mortgage rates reached an all-time low of 2.8% over the past year and continue to remain low, which allows qualified buyers to purchase more houses while maintaining lower monthly payments. Knowing that rates will eventually rise is encouraging buyers to stay in the game, rather than waiting for a cooling-off period. There are simply more people than ever competing for a limited number of homes.

Appraisals have also been a factor in buyers losing out on homes. Buyers can bid high, but the lender isn’t going to approve a loan for more than the appraisal amount. Cash offers are preferable only because sellers seem to be looking for the path of least resistance to closing.

FHA loans, while popular among first time home buyers, are at a distinct disadvantage in this market because sellers - whether it’s fair or not - are often under the impression that these buyers will need to jump through more hoops to close on the house, and will have less cash on hand to make up for gaps between the offer and the appraised value.

What buyers can do to make themselves stand out

Image by Gerd Altmann

Those searching for a new home shouldn’t expect the market to dramatically change anytime soon. People are slowly transitioning back to the workplace from work from home, mortgage rates may be going up, and as the country continues to re-open, there may be a cooling-off period. Even still, thanks to pent-up demand from the years before COVID, it will likely only go from an “extreme” seller's market to a “strong” seller's market. Demand will continue to outstrip supply for the next several years. So what can buyers do?

Buyers may want to start off their home search looking 10-20% below their ideal price range. This will give them more room for leverage and to comfortably bid well over asking. If they need a home a year from now, start searching for that home now, because many buyers are waiting 5+ months until they get into a home.

When mortgage rates are so low, another thing buyers can do is talk to mortgage lenders about taking a slightly higher interest rate to get lender credits they can put towards closing costs. This tactic has been helping first-time homebuyers who don’t have a lot of cash on hand.

If a buyer needs to take out a mortgage to purchase a home, they should consider making a statement to the seller as to exactly how much cash they are willing to bring to closing, in case the appraisal comes back below what the lender will pay. That’s a major factor in why people are getting outbid, and it’s something that someone who needs a mortgage is going to have to consider doing.

It can be tempting to add in contingencies (such as your own home having to sell for the purchase to go through), but realistically it is important to keep the deal as uncomplicated as possible because buyers simply don’t have the upper hand in this competitive market.

However, there’s one compromise buyers should never make. Don’t eliminate the inspection! Buyers can write the condition of the home in the contract “as is, with right to terminate” so that they have the ability to walk away if any major problem is uncovered. This protects buyers from buying a home with a major, undisclosed issue such as structural/foundational issues or a rotting roof while still assuring the seller they won’t be squabbling over a loose tile.

Buyers should have an in-depth talk with their Realtors about what will help them stand out in their local market and follow their advice. If they say your offer is too soft, it probably is. If a Realtor says the buyers must drop some of their “must-haves,” do it.

Buyers should manage expectations so that they’re prepared for the likely event that they need to bid on multiple homes. Don’t fall in love with the first home either; see a second home right after it. Expect to write multiple offers, and expect to get outbid multiple times. It’s all part of the journey to homeownership in today’s market, and it’ll be worth it once the home has been secured.

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