As the calendar flipped to a late spring day, an enticing three-bedroom, 1924 bungalow nestled in Minneapolis stirred quite a commotion in the housing market. Listed on a Friday afternoon, it rapidly garnered attention from prospective buyers, causing a whirlwind of activity over the weekend. An overwhelming number of offers, precisely 25, flooded in, each surpassing the listing price of $320,000. The fervor culminated within 48 hours with a contract from a buyer offering well beyond the asking price.
Surprisingly, this fervor contradicts the prevailing belief that the housing market is cooling down. Statistics indicate a 22% decrease in home sales in March compared to the previous year, while median prices have also dipped. This drop is primarily attributed to mortgage rates, which more than doubled throughout 2022. So, why does the market still seem feverish to many buyers?
The answer lies in the persistent issue of low inventory. Despite a decrease in the number of people buying homes compared to last year, the market still hosts more buyers than available properties, leading to intense bidding wars.
Of course, not every home incites a competitive scramble. Data from the National Association of Realtors shows that the overall time on the market has increased from 17 days a year ago to 29 days in March. Nevertheless, during the same period, 28% of homes sold for more than their list price, indicating a still vibrant market.
Efforts are underway to address the shortage of available homes. In the Hiawatha neighborhood where the aforementioned bungalow was listed, residents are being encouraged to consider the potential benefits of selling. They're reminded of the fact that there were 24 eager buyers ready to pay over the asking price for a home in their neighborhood. This demonstrates the market's potential and poses a question: Might they be interested in capitalizing on this demand?
The perceived cooling of the housing market might not align with the reality experienced by many buyers. In spring 2021, with mortgage rates hovering around 3% and the pandemic prompting many to reconsider their living situations, the real estate market was white hot. Competition was fierce, with some buyers even resorting to extravagant gestures, such as offering vacations in the Caribbean, to secure a home.
Fast forward to the present, with mortgage rates now exceeding 6%, and the market is ostensibly cooler. Properties are lingering longer on the market, ostensibly offering buyers more time to ponder their decisions. Yet, in regions like Westchester County, a suburb of New York City, the market remains scorching. Demand continues to outstrip supply, pushing prices from $50,000 to $200,000 over the asking price. In one extreme case in Rye, New York, a property sold for an astounding $600,000 over the asking price.
The current climate can create confusion for potential buyers, especially when properties are intentionally listed low to incite bidding wars. In the face of volatile mortgage rates, these tactics can drastically change what buyers believe they can afford, leading some to retreat from their bids. This has spurred the need for strategies to aid buyers who find themselves repeatedly outbid.
The housing market poses a significant challenge for homebuyers, who are not only grappling with higher interest rates than a year ago but also face intense competition due to the scarce inventory. The surge in mortgage rates, a result of the Federal Reserve's efforts to curb inflation, has significantly altered the monthly cost of owning a home, pushing many potential buyers out of the market.
In a typical market, a drop in demand would lead to an increase in supply. However, the current housing market defies this logic. Many homeowners, benefiting from ultra-low interest rates, are hesitant to list their properties. While the total inventory of homes for sale in April is higher than last year, it remains considerably below pre-pandemic levels. More alarmingly, the number of newly listed homes has dropped by 21.3% from a year ago.
The competitive nature of the market became evident earlier this year, when an open house for a three-bedroom, 1958 ranch home in Pleasantville, New York, attracted a staggering 100 visitors. The home eventually sold for $75,000 over the asking price, a testament to the intense competition in certain markets.
However, the situation is not the same across the country. While some regions are embroiled in constant bidding wars, others are experiencing less pressure. Prices of single-family existing homes in the first quarter increased in 70% of cities from a year ago. This implies that there are still areas where prices remain stable or are not escalating. The national median price for a single-family home actually dropped by 0.2% in the first quarter from one year ago to $371,200.
Yet, home affordability continues to worsen. The monthly mortgage payment for a typical existing single-family home with a 20% down payment has surged 33% from a year ago, now standing at $1,859. This dynamic is particularly pronounced in expensive markets, where the high prices make these homes more sensitive to mortgage rate changes.
In cities like San Francisco and San Jose in California, as well as Reno, Nevada, home prices have dropped by at least 10% from a year ago. On the other hand, cities like Milwaukee, Dayton, Ohio, and Oklahoma City have seen prices rise by at least 10% from the previous year. In some cities that experienced rapid price gains in the past, such as Boise City and Austin, the recent price reductions have improved housing affordability, prompting some buyers to reenter the market.
However, the cooling in some parts of the country may be short-lived due to the ongoing housing inventory shortage. The return of multiple offers, especially on affordable homes, may lead to a resurgence in price increases. The current state of the housing market can be best described as a paradox: cooling on the surface, yet fiercely competitive underneath. As the market continues to evolve, both buyers and sellers must navigate this complex landscape with careful consideration and strategic planning.