The Last Bidding War for Homes

This article is original content written by Manchester, CT Financial Advisor Thomas Scanlon, CFP®, CPA

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Has the residential real estate market been on fire or what?

Wow!

Everyone has a great story (sellers) or a nightmare (buyers). Keep in mind, real estate is hyper local. The amounts paid over the asking price continue to escalate.  Some sellers now are not allowing a mortgage contingency for an appraisal.  This contingency means that if the property did not appraise near the asking price, the buyer can walk away.  Without this specific contingency, the buyer must close the transaction. Yeah, you need to bid over the asking price and you cannot put a contingency in for an appraisal.  What does that mean to the buyer?  Perhaps you won’t get a mortgage as banks won’t loan more than a property is worth.  At the very least, you will likely need to put more cash down. Finally, if the asking price was near the fair market value and you bid more, you have likely paid more than the fair market value. Ouch.

Additionally, some sellers will not allow a contingency for an inspection.   Similar to not allowing a mortgage contingency for an appraisal, this puts the buyer in a difficult spot.  Some homes were built by master craftsman using high quality materials. Other homes were built with something far less than this.  The eye test works fine for assessing the curb appeal. Not so much for foundations, boilers and roofs.  Obviously older properties are subject to more wear and tear but all real estate needs repairs and maintenance. Without a professional inspector to go into the house and report on their findings, you are taking on more risk.

Then there are the sellers that will not accept a Hubbard’s Clause contingency.  This contingency essentially says that the buyer will only go through with the purchase if they sell their current house.  Good luck with getting that contingency in with this crazy market.

How Did We Get Here?

Let’s look back to 2008-2009.  This was called the Great Recession.  This was clearly mislabeled.

First, there was nothing Great about it.

Second, for many it was a Depression, not a Recession.

The old saying is that it was a Recession when your neighbor was out of work.  It was only a Depression when you were out of work.   The real estate (and stock) markets were going gangbusters…until they were not.  It was very ugly.

One outcome of this was that there was very little building in the subsequent years.  Why would there be?  Real Estate was crashing. 

One of the Federal Governments responses was to cut interest rates to near zero.  Then they held them there artificially for over a decade. There’s nothing like near free money to have our U.S. consumers try to keep up with the Jones’s and get their McMansion.

Then bring in millennials. In 2021, there are about 72 million millennials and they are currently between 25 and 40 years old.  In other words, they are tired of living in their parent’s basement or splitting an apartment with six of their most intimate friends. They have been joining the homeownership party.

Then, the Pandemic hit.  Sorry, with the Delta variant, it’s still hitting. This has caused the Work-From-Home (WFH) movement to just explode.

Finally, there are more real-estate agents than there are homes for sale. (1)

Let that sink in for a minute.

Lessons Learned

  • If you already own your home and it’s appreciated in value, enjoy the ride. Depending on your station in life, perhaps it’s time to sell and downsize.
  • Don’t take out that huge mortgage just because you ‘Qualify.’  It’s like wearing a Speedo, just because you can, doesn’t mean you should.
  • I know you hate renting.  At the end of the year, all you have is a cigar box full of rent receipts. Face it; you have to live somewhere.  I hope that it is not with your in-laws.  Just kidding. Sort of.
  • The worm will turn. It ALWAYS does.  This one may take longer than in the past, but it will turn. Prices will, eventfully, flat line and then decline.
  1. Wall Street Journal – March 21, 2021