According to the National Association of Realtors, total housing inventory at the end of June 2020 was down 18.2% from a year ago. Homes are being placed on the market for sale and frequently receiving multiple offers resulting in bidding wars. This shortage of inventory promotes higher home values and sales prices for homeowners. The other side of the coin is fewer homes on the market for potential buyers. Here are a few of the reasons and some of the logic driving bidding wars:
According to the Washington Post, the 30-year fixed interest rate is the lowest it's ever been since Freddie Mac began keeping track of mortgage interest rates in 1971. More people are financially able to be qualified for mortgages right now including many looking to buy for the first time. Move-up buyers can afford the payment on larger homes and investors are purchasing more homes because money is so cheap to finance. Interest rates are putting more buyers in the market.
More people are buying homes because of their changing lifestyles. Baby Boomers are downsizing right now and want smaller homes with no stairs. they're in the market for ranches, condos, townhomes or homes in 55+ communities. Millennials are financially able to purchase their first homes, as they've been paying off student loans and other debt. They are now able to afford smaller, first-time buyer homes such as ranches, condominiums and townhomes as well.
The coronavirus has caused a lot of financial pain in the world so far in 2020. However, unlike the recession in 2008, real estate is actually the main driving force to get us out of this recession. The coronavirus is keeping interest rates low to help the economy recover. Many potential sellers are afraid to sell their homes right now as they fear having buyers and Realtors walking through their homes, helping to keep inventory low.
How Does a Bidding War Work?
Since the housing inventory is so low and there is a surplus of buyers on the market, when people find a house they like, often times other buyers are interested too. When more than one party submits an offer to purchase a home, sellers will usually ask all of the buyers for their "highest and best offers." This results in bidding wars.
Is Price the Only Factor in a Bidding War?
Buyers need to present offers that are attractive to sellers in more ways than just price. Buyers have to be financially strong. They have to be able to close when it's most convenient for the sellers. They must present fewer contingencies in their contracts.
Who Do Bidding Wars Benefit?
Bidding wars benefit home sellers and mortgage lenders. However, sellers have to be careful when accepting significantly higher prices as this may cause problems with their home being able to appraise. If you're in this scenario, be sure to discuss this with your Realtor as the buyer may have to come up with additional cash to satisfy the lender. The lender of course, most likely only lending to the appraised value of the home.
Bidding wars are a sign of a strong real estate market. A strong real estate market helps grow the economy.