“Nonconforming mortgages weren’t a primary cause of the last (pre-2008 crisis) housing price boom. Their expanded availability and use was a symptom of the housing price boom. Today’s housing price boom is mostly about supply and demand and low mortgage rates (distorted low by the Fed), just like it was last time…
…And in major U.S. markets, like it or not, housing has become a luxury item (no longer tethered to median U.S. incomes).”, Mike Perry, former Chairman and CEO, IndyMac Bank
Bidding Wars Return to Home Market
This time, the battles are prompted by too few homes offered for sale, not easy-to-get mortgages
Bidding wars have returned to some metro areas as the housing market remains tight. Above, Windsor, Calif., north of Santa Rosa. Photo: George Rose/Getty Images
By Kris Hudson
Christina and Kevin Dirks have been searching for a house in the Denver area for four months at prices up to $275,000. They made offers on six homes—and were outbid on each one.
“When we first started looking, you had to pay $10,000 over” list price to win the bidding, Ms. Dirks said. “Then, as the weeks went by, it went up to $20,000. And now it’s up to $30,000 and $40,000.”
Ms. Dirks, a 28-year-old office coordinator, said she and her husband, a 30-year-old merchandiser, hope that as the market slows down this winter, “people will put a halt on being so crazy.”
Bidding wars, a hallmark of last decade’s housing boom, are making a comeback in a number of metro areas across the U.S. But while the earlier wars reflected enthusiasm fueled by easy-money mortgages, the current froth stems from a market short of homes for sale.
The reasons for the scant supply are myriad, including a much-slower-than-expected recovery in home construction. Yet an equally significant problem is that millions of people aren’t listing their homes for sale because they suspect they can’t qualify for a new mortgage, can’t afford the costs associated with a sale or fear that they won’t prevail in the scrum for the few houses available.
At the end of May, there were 2.3 million existing U.S. homes for sale, enough supply to last 5.1 months at the current sales pace. That is below the six to seven months of supply that the National Association of Realtors says is needed for a balanced market.
But in more than one-third of the 300 largest metropolitan areas tracked by Realtor.com, homes listed for sale in June had been on the market for a median of less than two months. A low median figure indicates rapid turnover in inventory as demand for homes exceeds supply.
Those include big markets like San Francisco, with a median time on market of 27 days, and Dallas at 38 days, as well as smaller markets like Vallejo, Calif., at 26 days and Kennewick, Wash., at 36 days.
The tightest market in June was Santa Rosa, Calif., a relatively affordable Bay Area suburb, where the median time a home was on the market was 24 days.
In those markets with limited supply, bidding wars tend to push prices higher, creating price bubbles. According to Realtor.com, the $580,000 median listing price in Santa Rosa is up nearly 10% from a year ago. That handily outpaces the national average increase in resale prices, which the National Association of Realtors calculates at 7.9%. Realtor.com is operated by Move Inc., which like The Wall Street Journal is owned by News Corp.
The low supply of homes reflects a reluctance or inability of owners to sell their current house or apartment and trade up to their next, often larger, one. Some remain skittish about the economy, their own finances or their ability to qualify for a mortgage. Others can’t sell because they are underwater, meaning they owe more on their mortgages than the homes are worth.
Even though U.S. home prices are up 31% in the past five years, 15.4% of homes—an estimated 7.9 million—remained underwater in the first quarter, according to real estate website Zillow. The long term average is 3% to 5%, Zillow says. These owners can’t sell unless they have thousands, sometimes tens of thousands, of dollars on hand to pay the shortfall on their old mortgage and finance costs of selling and moving.
Another pressure on housing inventories is growth in U.S. household formation. The U.S. added roughly 1.5 million households in the first quarter from a year earlier, though almost all were formed by renters.
Some economists say renters will add demand to the housing market as steep rent increases prompt them to purchase. Apartment rents have risen nearly 16% nationwide since 2010, according to real-estate research firm Reis Inc.
Meanwhile, at least 2.6 million homes have been taken out of the market since 2008 after investors purchased them and converted them to rentals, according to Stephen Kim, a housing analyst at the U.S. unit of Barclays PLC.
“Today’s seller is tomorrow’s buyer, and people aren’t selling mainly because they don’t have anything to move to or they can’t afford what they find,” said Nela Richardson, chief economist at real-estate brokerage Redfin Corp. “We’re in this vicious cycle of low inventory, and there isn’t a short-term fix. Everyone thought the buyers would take a long time to recover from the downturn. But it’s not just the buyers, it’s the sellers.”
Earlier this year, Carrie Foster, a 33-year-old education specialist, considered selling her Portland, Ore., townhome, appraised at $400,000. But she changed her mind out of concern that she wouldn’t be able to find another home.
Ms. Foster looked at more than 100 homes online, but deemed nearly all of them overpriced. Still, she bid on one, offering $30,000 more than its $475,000 asking price. She lost out to another bidder. Homes for sale in the Portland area in June had been on the market for a median of only 38 days.
Ms. Foster has opted to sit out the market for another year until inventory loosens rather than chancing the alternative of selling her townhome and renting elsewhere until she can beat out other bidders for her next home purchase.
“Homes are [selling] within days, going for tens of thousands of dollars above asking price,” she said. “I didn’t want to be pressured into making an offer on a home the day that I see it.”
Kelli and Ben Barnett, who aren’t underwater on their mortgage, own the type of house that many first-time buyers are seeking: a relatively new three-bedroom ranch in the Denver suburb of Castle Rock. The Denver area in June tied with Sacramento, Calif., as the fourth-tightest market, with 29 days of supply.
But rather than listing, the Barnetts are abstaining.
The couple paid $270,000 for their house in 2005 when it was newly built. They financed the entire cost, a technique common during the boom but nearly extinct today. Now, 10 years and a refinancing later, the Barnetts’ home is appraised at $287,000 and they owe $269,000. The $17,000 in equity isn’t enough to cover the costs of moving, including a down payment, real estate fees, closing costs and thousands of dollars in anticipated repairs to the current house to ready it for sale.
In addition, Ms. Barnett is concerned that, because she took a lower-paying job with less travel since 2013 to look after the youngest two of her three children, the couple won’t qualify to borrow as much as they did just two years ago when they refinanced.
“It just feels like we haven’t had any options while the real-estate market was going through its slump,” Ms. Barnett said. “Now as we see it recovering, we see all of our neighbors moving and we feel like it should be our turn as well. But it’s not. We’re going to have to wait longer.”
During times of weak inventory, home builders normally ramp up construction. But though construction picked up this spring, the national pace of building single-family homes in June amounted to just 49.7% of the annual average from 2001 to 2003, which the National Association of Home Builders considers the latest normal housing market.
Aside from a lack of demand in recent years for entry-level for-sale housing, a major reason for the tepid construction is a persistent lack of financing for small and midsize builders. The Federal Deposit Insurance Corp. estimates that outstanding loans by FDIC-backed institutions for home construction totaled $53.6 billion in the first quarter. That figure has climbed steadily from its nadir in early 2013, but it remains 71% below its peak of $186.3 billion in early 2008.
Financing has been particularly difficult to land for small builders and developers, which collectively account for most U.S. home construction. The 10 largest publicly traded U.S. builders, which are the few that are truly national in scope, accounted for only 27% of new homes sold last year, according to the National Association of Home Builders.
Chicago-based Next Generation Development LLC is one of those small developer-builders. Chief Executive James Hughes said Next Gen built 80 homes last year. He said demand warrants building a greater number this year, but the scarcity of development financing limits him from doing so.
“There is the opportunity with the right product in the right places to build and sell homes,” Mr. Hughes said. “Unfortunately, the [dearth of development] financing is still a big hurdle to clear.”