Here’s why our real estate market is in a price bubble right now.
Presently, we’re selling more homes than are available on the market, meaning housing availability is shrinking dramatically. We’re already in a price bubble because homes are selling, on average, at about 43% over their list prices. Last year, that average was 26%
So why not just build more homes? During the COVID-19 lockdown, many homeowners decided to remodel their homes, which means prices for plywood and other building products rose sky-high. Plywood prices, for example, rose 300%. This means builders have to absorb these costs somehow.
A shortage of building materials led to home prices (including new construction) going way up. Builders can only afford to build so many homes at one time, so they’re not building as many homes as they want, which doesn’t satisfy demand. This demand isn’t going anywhere either because investors are pulling their money out of financial markets and investing it in places where they can get better interest rates or returns on their investments. In this case, that’s real estate.
"We’re already in a price bubble because homes are selling, on average, at about 43% over their list prices."
Next, if you’re a buyer and want to win any kind of bid, you have to bid way over asking price with nonrefundable down payments that exceed $10,000 or $20,000. Most offers out there will be cash offers, and sellers like them because that means they don’t have to wait until just before the closing date for their buyer’s loan to be approved. A cash offer also means there’s no appraisal involved in the transaction, which is another reason these offers are going way over asking price—there’s no worry over the property being appraised at the accepted offer price. Therefore, a lot of financed offers are leaving the market.
Cash buyers have preference over financed buyers, but you can make a combination offer by getting a loan and agreeing to pay the potential appraisal difference in cash. The current market is difficult for first-time homebuyers, and many of them are being squeezed out of the market. Sometimes they just need to look in a different area to buy in or increase their budget considerably.
According to Realtor.com, a Maryland home recently got 88 offers after it was listed—76 of which were cash offers, and 70% of those offers were over asking price. The bottom line is that if you want to buy a quality house, you need to have cash in the bank and be able to bid high. Forget about negotiating prices downward.
If you’d like to know more about our market or need help buying a home, don’t hesitate to reach out to me. I’d love to help you.