Avoid panic buying in an ultra-competitive real estate market
With a still insufficient housing stock and historically low mortgage rates starting to rise, the real estate market has gone from lively to combative. In such a competitive environment, many buyers feel compelled to act quickly and stretch their budget to ensure that a property they love does not fall through the cracks. In fact, according to a homeownership report from Hippo Insurance, 68% of buyers in 2021 paid above the asking price.
Kevin Kieffer, a real estate agent with Compass’ EastBayPro team in the San Francisco Bay Area, calls this behavior “panic buying.” In today’s market, he says, it can be easy for would-be owners to get in over their heads. Don’t let this happen to you. Instead, familiarize yourself with panic buying and its pitfalls, and learn how to avoid them.
What is panic buying?
“Buyers are so scared that they won’t miss these low rates and they won’t be able to buy a house anymore,” says Kieffer. “They’re just panicking, which creates irrational decisions.”
It is already common for buyers in particularly competitive fields to waive contingencies in their bids or to include valuation gap coverage. But Kieffer says he also sees a lot of people offering way more than the asking price. In many areas, homes selling above asking price have become the norm.
“We see 10 offers come in on a property, and, like, two of them just blow the comps by 15 or 20 percent,” he says. “Twenty percent is something we’ve never seen before.”
Buyers are also not content to outdo each other with high bids. This practice of forgoing contingencies means that new owners could face costly repairs as soon as they move in. In fact, according to Hippo, 81% of new first-time home buyers experienced unplanned repairs in the first year. And 66% of all new owners spent $1,000 or more on repairs in the first year.
Courtney Klosterman, home information expert at Hippo, notes that COVID has added another layer of complication to the real estate landscape with the need for virtual tours, leading more people than ever to buy homes without viewing them in person first. .
Buyer’s remorse: What are the regrets of the new owners?
“There are a lot of people buying a home for the first time, and they just don’t realize the amount of stuff you have to do to maintain a home,” says Steve Wilson, senior director of underwriting at Hippo. “People are remorseful about home maintenance and how not doing that maintenance can lead to a costly problem.”
Things like plumbing, electrical, and air conditioning systems are important to check before closing, as well as structural parts of the home like the foundation, roof, and attic. “These are all things that are easy to see on a basic walkthrough and can help inform your decision whether or not to buy this house,” Wilson says.
Even if you waive your inspection requirement, that doesn’t mean you should completely skip the home inspection. It’s a good idea to always do an inspection, so you know what you’re getting into and can budget for any repairs that will be needed after you move in.
Klosterman adds that for people leaving a city for the suburbs or moving to another part of the country, it’s especially important to understand the environmental risks in your new area.
“I found that a lot of people, especially in the California, Texas, Florida and New York areas, didn’t look into home insurance before buying the house,” she says. “And then they are in shock that they are in a forest fire zone, a flood zone or a hurricane zone.” These external factors can lead to large additional expenses.
How to Avoid Panic Buying
First and foremost, says Klosterman, you should work with a knowledgeable real estate agent. But it’s also a good idea to talk to owners in your personal orbit. “It really makes sense to rely on a trusted owner during the process. Someone in the area, someone you know and trust, other than your real estate agent,” she says. “No offense to our wonderful real estate agents, but they are going to look at properties very differently from you.”
Beyond that, it’s important not to rush and make sure you’re prepared to ask crucial questions about the condition of a property and your mortgage throughout the process.
Kieffer adds that many buyers are adjusting their expectations as well, as homes continue to sell well above their list price. “A lot of people regress their target price,” he says. “They have to take a step back to look at the properties they are capable of buying.”
One-upmanship: causes and consequences
In an overheated housing market like the one we are currently experiencing, bidding wars, which involve multiple buyers competing for the same property, are more common than ever. Bidding on a house is more art than science, but the rule of thumb is that you don’t want to end up with more house than you can afford or pay much more than market value.
It’s smart for most buyers to set a budget well before they start shopping and stick to it, no matter how in love with a property they might fall. Keep in mind that if you bid too much for a property, the appraisal is almost certain to be low. And a low valuation means you’ll likely need to add more money to the deal to fill the gap.
If you’re not sure where to start with your budget, check out Bankrate’s housing affordability and mortgage payment calculators, which can help you estimate your monthly costs and figure out what your budget should look like.
If you can’t find a forever home in your price range, consider a first home. If all else fails, remember that patience can pay off. The hot housing market will almost certainly cool down eventually, and inventories will slowly rise over time. You may find more favorable market conditions – and fewer bidders – if you wait a bit.
At the end of the line
For most people, a home is the biggest purchase they will ever make. It’s not a trade to be made lightly, and it’s not a race to the closing table. If you’re overwhelmed by the housing market, find professionals who can guide you through the process. And don’t be afraid to walk away from a deal that could end up leaving you with a home you can’t afford to maintain or pay for.
Also, remember that there is an emergency escape hatch in a competitive real estate climate like this.
“You may always have the option, since it’s a hot market, to sell the house if it’s really not for you,” Wilson says. “Maybe you didn’t have this two years ago.”
Faced with a battered real estate market, it is better not to get carried away by the many negative emotions on offer.