The winner in these crazy bidding wars isn’t the buyer. It’s the seller. For buyers, it’s a Perfect Time to make a Terrible Deal.
By Wolf Richter. This is the transcript of my podcast last Sunday, THE WOLF STREET REPORT.
Regardless of who is doing the counting, they all agree: Home prices are surging, and specifically, the prices of single-family houses are surging. This is less the case for condo prices. In some cities, for example in San Francisco, condo prices are actually down.
Overall home prices – that includes houses, condos and co-ops – have spiked by 17% in March compared to March last year, according to the National Association of Realtors. In terms of single-family houses by themselves, prices have spiked by over 18%. In some red-hot markets, prices have spiked by 25% or more.
There is plenty of condo inventory on the market. But there has been a sudden land rush to buy houses, and inventory of houses has become very tight.
This tight inventory is in part the result of homeowners not selling their old home when they buy a new home. They’re trying to ride up the wave of surging prices with both homes. This is now common practice; it’s a highly leveraged financial gamble, and while this gamble is working, it makes perfect financial sense.
Every month that you wait with selling the old house that is now vacant, the market keeps getting crazier, and more stories are being circulated about insane bidding wars, huge amounts paid over asking prices with conditions and inspections waved, as buyers are suffering a pandemic of FOMO, the fear of missing out.
For buyers, this is a terrible time trying to buy a home. The winner in a crazy bidding war isn’t the final buyer. It’s the seller of the home.
In these crazy bidding wars, the buyer is the loser. A bidding war is not a win-win deal. A bidding war is a win-lose deal. Bad deals are made in good times. And for buyers, this is a perfect time to make a terrible deal.
But for sellers, this is the perfect time to make a great deal. And when the market turns, that opportunity to clean out an eager FOMO-driven buyer will suddenly be gone.
And something else will be gone: liquidity.
Liquidity in the housing market is when you can easily and quickly sell your home at the price you envision, or for even more.
Under normal conditions, a housing market is not very liquid. It takes weeks or months to find an interested buyer. And that may be the only buyer that shows up at that price. And that buyer wants to negotiate the price down.
Cutting the price might bring out more buyers. And then the buyers have conditions, and there are inspections to be made, and buyers negotiate and haggle and want a better deal, and they walk away, or they might not get the mortgage needed to buy the home at that price, or whatever.
In a down-market, when home prices are declining, the housing market becomes illiquid at the prices that sellers envision. No one shows up. And you cannot sell at that price. You have to cut the price, and even then, no one shows up. But you can’t cut the price further because if you did cut to a level where you might be able to sell it, you couldn’t even pay off the mortgage with the sales proceeds.
And now the eager seller is stuck. At that point, some eager sellers might stop making mortgage payments and wait for the bank to take the home back. Others sell the home and cough up the difference from their savings to pay off the bank. Others are holding out, they pull the home off the market, waiting for better times, and paying the carrying costs of holding the house.
However they’re doing it, getting out from under a now overpriced home in an illiquid market is an arduous painful procedure.
But it’s particularly arduous and painful when it’s a second home that is now vacant; and that has carrying costs, such as a mortgage, insurance, taxes, and maintenance, and where renting it out wouldn’t even cover the mortgage payments. During the housing bust, a lot of damage was done by people who owned multiple homes that they walked away from.
This type of market is now just a distant memory, if even that. In many people’s minds, home prices never decline. You can’t lose money in real estate, as the saying goes. But that kind of thinking clouds decision making about timing.
So what we’re talking about here is the second home that no one lives in and that has carrying costs, and that has just become a big highly leveraged financial bet on constantly surging home prices.
The owner can put that house on the market any time, and when it sells, they don’t have to move because they’re living somewhere else. They’re treating it like a financial product, not a home; they’re just wanting to ride up the price explosion until the very last moment, and then get out.
Today, a seller can get out in no time, and take their money from the FOMO-addled buyer, and from the loosey-goosey lending that pervades the land, and from the taxpayer that backs many of these mortgages. And the seller can now just take all this money and run.
But if the seller decides to hang on to the house for a while longer to wring every dime out of this crazy price explosion until they see the market turning, and at that point they decide to sell, well by then, suddenly that liquidity in the housing market that they now will have totally evaporated.
They put the house on the market at the price they envision, and no one shows up. Then they go through the procedure of cutting the price until they get the first nibbles. And those first nibbles are going to be careful buyers, and they bid below the already lowered asking price, they want to negotiate all kinds of things that need to be done to the house, and they insist on inspections, and their lenders might put a cap on what they’re willing to lend.
If potential sellers miss the turning point in the market, that’s what they may face down the road when they do want to sell. And that easy money that their highly leveraged financial bet produced begins to evaporate.
But never in my life have I seen a better time to sell a house than now. For sellers, this is a pain-free, ultra-easy, and very profitable time to sell.
Today, the buyers – and this could be a family or a corporate buyer that already owns tens of thousands of homes, or it could be Zillow, or any of the other so-called iBuyers that make instant algo-driven offers to buy your home – they’re not only volunteering to get ripped off; they’re begging to get ripped off. And they love you for ripping them off.
Today, the entire real estate industry is pulling for the seller. They’ll try to make it happen. And the lenders are pulling for the seller. Mortgage rates have risen over the past four months, but they’re still low, and lending is still easy. And the taxpayer is pulling for sellers.
And then there is this: about 2.3 million mortgages are still in forbearance. These mortgages are going to exit forbearance one way or the other. One way to exit forbearance is to sell the home and pay off the mortgage. Many of these homes that are now in forbearance are waiting in the shadow inventory to be sold when the forbearance expires. And suddenly, there are going to be a lot more sellers.
Profit-taking is an ancient concept. There comes a time when the selling is easy and immensely profitable, when buyers are willing to do anything and forgo everything to make a terrible deal, while soothing their anxieties by muttering to themselves or to others that this time it’s different.
And the owner has made tons of money, and it’s enough, though they might be able to make a little more if they hold out a little longer, but they don’t know, and they sell while they still can, and they take their pile of money and run. And the time slot we’re in today is perfect for that.
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