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The U.S. housing market has gone crazy recently. Buyers are waiving inspections, waiving appraisals and waiving mortgage contingency to get a house that ultimately sells for $50,000 to $100,000 over asking. And, of course, there are countless bidding wars. Have buyers gone insane?
Anna Bahney, writing for CNN Business, tells the story of a client who had offered $15,000 over an asking price of $530,000. The second bidder offered $25,000 over. The first bidder responded with a sweetener: Ten ether coins. Ethereum was trading at $3,900 at this time.
The more creative bidder got the home.
Why all the Bidding Wars?
In crude terms, the bidding wars and insane prices arise from an inequality of supply and demand. On the supply side, home construction has simply failed to keep up. There is a shortage of labor in many of the skilled trades involved, pandemic-related disruptions in the supply chains of various materials, and record-high costs when they can be secured.
The disrupted supply chains include sheet rock, cabinets, and kitchen appliances. In April, because of such difficulties, U.S. housing starts fell by 9.5%.
On the demand side of the equation: home ownership has always been part of “the American dream.” There is always demand for a piece of land and a structure — sometimes “ever so humble,” sometimes not –where that dream can play itself out.
The pandemic didn’t create that demand, of course: but it did lead to the deferral of many planned home purchases for more than year. Now that deferred demand is expressing itself in the search for these supply-constrained houses. Thus: the insanity.
Home buyers are finding crazy ways to stand out, beyond the standard bidding wars. Determined buyers can resort to fashionable cryptocurrencies, they can pay a competing bidder hundreds of thousands to go away, they can offer rare wines, or to buy two homes in order to get the one they really want.
Are Love Letters Crazy?
Although some buyers try to create a personal relationship with sellers with “why you should choose me” letters, experts say that can backfire badly. In a recent blog post the National Association of Realtors explained: “These letters can actually pose fair housing risks because they often contain personal information and reveal characteristics of the buyer, such as race, religion, or familial status, which could then be used, knowingly or through unconscious bias, as an unlawful basis for a seller’s decision to accept or reject an offer.”
The NAR is advising realtors to refuse to deliver “love letters.”
But what’s certainly allowed is all-cash offers. Financing increases the transaction costs and creates delays. All-cash offers take the lender out of the picture. They also remove the need for an appraisal, which itself adds a week or more to the sales process. A quick and easy “I’ve got the cash in hand right here” offer can be very tempting.
What Does the Future Look Like?
It is probably safe to predict that we are headed for a home construction boom. The necessary difficulties now constraining supply will be corrected or worked around. Lumber prices, as it happens, have begun to fall, so that particular bottleneck has already opened.
The senior vice president of the Rosen Consulting Group, David Bank, said recently that the United States needs many different varieties of housing. “We need affordable, we need market rate, we need single family, we need multi-family.” The more options we have, the more prices will come down. If you’re able to wait until December, the market will likely be in a better place.