Real Estate Bidding Wars Spark Housing Bubbles in Hot Markets

You may have seen the headlines…“Bidding Wars Return to Boston Condo Market”…“National Association of Realtors (NAR) Announces Home Sales Lowest Since 1999”…“Why Real Estate Listings Are So Hot Right Now”… and others.

Do these headlines contain typos? No. Home prices are rising in many areas across the United States and investors from Wall Street and other countries are leading the charge.  They took advantage of distressed real estate during the short-sale glory days, purchasing properties at bargain-basement prices and, rather than flipping those homes as might happen in a healthy housing market, renting homes to former homeowners displaced by short sales and foreclosures.

Now, with fewer homes for sale and increasing buyer demand, the bidding wars have begun in earnest, producing bubbles in the hottest housing markets like Charlotte, Los Angeles, and San Diego.

Are we headed for another housing crash? No, says Zillow’s director of economic research, Svenja Gudell, who points out that lenders are no longer making questionable loans and bubbles seem to be confined to expensive cities. More homes are on the market, and fewer people owe more on their mortgages than their homes are worth. Prices will cool off, increasing home values to more normal rates of growth between 3 and 5 percent, compared to 2013’s 7 percent.

Great News for Sellers.  What About Buyers?

Experts predict that seller inventory may not keep pace with buyer demand.
Lawrence Yun, NAR’s chief economist, explains, “Buyer traffic is 40% above a year ago. We expect a seasonal rise of inventory this spring, but it may be insufficient to avoid more frequent incidences of multiple bidding and faster-than-normal price growth.”
In Connecticut, buyers are frustrated by the “the slow trickle of new listings.” (Hartford Courant)  In Denver, half of new homes for sale sell in less than 30 days.  Nine out of ten homes in hot California markets have triggered bidding wars, along with two-thirds of properties in Boston, New York City, Seattle, and Washington, D.C. (CNN Money)
The question is not whether a new listing will receive multiple bids, but how many, meaning that buyers may feel manipulated into overbidding, especially in the mid-range market. The current trend, considered sleazy by some, is underpricing, aimed at getting multiple offers in order to sell the home faster. This can lead to buyers trying to outbid one another without the yardstick of true home value, potentially paying more than the sellers expected, or more than the home is actually worth.

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Brian Davison
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I am the CEO of EquiAlt: real estate based alternative investment firm with activities in equity, debt and private equity. Since 2008, EquiAlt's management has demonstrated a high level of competence in hundreds of distressed asset transactions, recapitalized companies while lending on landmark Las Vegas projects.

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