Over the last few months in California's Bay Area, real estate agent Christina Kokologiannakis says that homes have sold for as much as 106% over asking price — and that's just one example. The nationwide real estate market is booming right now as buyers take advantage of low interest rates (which dropped again for the first time in two months), but prices are being driven up by even lower inventory. This is creating a market where buyers are bidding above asking price or waiving contingencies (conditions that need to be met in order for a sale to move forward, like a satisfactory home inspection).
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"In order to be competitive on the buying side, buyers have to really consider removing their contingencies," Kokologiannakis tells Hunker. "But it's very hard for buyers to be prepared to go $200k to $400k over asking and to remove their contingencies, plus assume that they will have to pay cash for the increased price of the home if and when the appraisal does not come in at value."
While California is known for its expensive real estate, the trend of homes selling quickly and above asking price is playing out across the country — even in the Midwest, where the cost of living is relatively low.
"The heart of the United States is echoing markets across much of the country right now, and there's a lack of inventory in Lincoln, Nebraska, when it comes to new construction homes and existing homes," realtor Melanie Dawkins, who is based in Lincoln, tells Hunker. "The average price of a home in Lincoln, Nebraska, is $230,000, which is now closing for at least $250,000. And if a buyer gets a deal at that price, they usually have to waive a whole house inspection."
Forecasts show that these burgeoning home prices and low interest rates are expected to stay consistent for the foreseeable future. In fact, The Balance reports that as of March 2021, the Federal Open Market Committee (FOMC) announced that it doesn't plan on increasing rates until 2023 (or until inflation stays at or above 2%). The FOMC specifically stated that the fed funds rate — which affects consumer interest rates — will stay between a range of 0% to 0.25%. In terms of mortgage rates, as of April 2021, NerdWallet reports that the highest rate is 3.016% for a 30-year, fixed-rate mortgage.
Some may have also looked at the soaring 2020 pandemic unemployment rate as a sign that Americans were not going to be house hunting this year, but according to Kokologiannakis, the population that's in the market for a home wasn't hit as hard.
Kokologiannakis says, "If you look at the people who are most affected by [the pandemic], they're people who are already in the multigenerational houses or are renters who were not able to get into the housing market at this time. The people who are in the housing market have jobs that are still staying strong during COVID, which is why the market is still pushing ahead. Then you have sellers who have nowhere to go because the market is so strong, so they stay put, which creates lower inventory with the same amount of demand."
Geoffrey Frid, a real estate broker in Beverly Hills, also speculates that the booming market is because of young buyers who have been waiting on the sidelines. Across the country, home prices have risen indiscriminately with young buyers showing a demand for both urban and suburban dwellings.
"The market is being driven by millennials looking to purchase their first home in combination with low interest rates, which is motivating those who have rented for years to take the plunge into home ownership," Frid tells Hunker. "Also, there will be a substantial transfer of wealth within the next 10 years, mostly from older generations retiring or passing away. Once all that equity is turned around, it will allow for the younger population to further invest in property."
There's even speculation that upcoming warm weather coupled with access to vaccinations may motivate buyers who have have been hesitant to put their homes on the market during a pandemic. That could loosen up inventory in some markets, but for now, it's still proving difficult for entry-level buyers to get their foot in the door.
In states like South Carolina, agents are having a hard time finding properties for their clients who are often first-time buyers. Columbia, South Carolina, realtor Alisha Giles says that home prices are experiencing a dramatic market shift with no signs of slowing down, making it important for buyers to get in now if they can.
"Right now, the housing market in South Carolina, specifically Columbia, is insane. We are seeing an influx of pre-approved buyers but little to no inventory for these clients to purchase," Giles tells Hunker. "Current buyers are foregoing incentives, waiving appraisal contingencies, and paying up to 3% earnest money — while previously 1% was common. On top of this, buyers are competing with multiple offers, thus driving the sales price up at an alarming rate. Buyers are up for a major fight if they are currently searching for a home."
Agents are not sure about when exactly the market will ever calm down, but there's a consensus that the market could level out if interest rates are raised. However, based on what the FOMC has stated, this might not happen until 2023. Since low interest rates are attracting millennial buyers, higher interest rates at that time may also end up curbing the buying streak while allowing the market to calm down even more. This was demonstrated when interest rates reached the highest point since June 2020 because mortgage loan applications subsequently fell by 5.1%, according to Forbes.
"The only way you will see it calm down is if you have more supply than demand," Kokologiannakis concludes. "If interest rates go really high, like they were in the '80s, at 7% or 10%, it can cut out a lot of buyers from buying homes. Fewer buyers means more homes on the market, less competition, lower prices, and a calmer market."