Buying and Selling a House in a Hot Market

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COLLEGE PARK, Md., June 21, 2021 /PRNewswire/ -- In the United States, prospective home buyers are facing fierce competition for limited inventory, as low mortgage rates and pent-up demand drives a seller's market. Homes for sale are seeing multiple offers, often above the asking price and above appraised value.

Elinda F. Kiss, associate clinical professor of finance at the University of Maryland's Robert H. Smith School of Business, has been watching the market frenzy closely. In a recent Q&A, she shared these insights.

Q: What advice do you have for buyers, as they look to buy a home in the current housing market?
A: To stimulate an economy that was depressed due to decreased spending during the pandemic in 2020, the Federal Reserve slashed interest rates and injected hundreds of billions of dollars into the markets through purchases of securities. In the spring of 2020, no one could visit a house for sale due to the pandemic quarantine. By autumn of 2020, there was pent-up demand to buy houses that were not available in the traditional buying season of the spring. Low interest rates made it possible for buyers to pay more for a house because low interest rates mean lower monthly mortgage payments.

Consequently, in the current landscape, there simply are more buyers than sellers, and homes are moving quickly — often for more than the asking price. (Our daughter had to offer $20,000 more than the asking price because they had been outbid on 20 previous houses. Not surprisingly, the house she bought did not appraise that highly, but the agreement that the sellers accepted from her had the sellers cover half of the difference between the appraisal and her offer.)

If you are willing to make an all-cash offer, you have an edge, because the sellers know that the sale can close quickly without contingencies, but to improve your chances of having an offer accepted in this market, you may need to act fast and think creatively.

First, if you can, get a pre-approval letter from a reputable lender; that letter will show that you are credit-worthy and can afford the mortgage that you will need to borrow to buy the house. The sellers want a buyer who can close quickly and may be flexible as to the closing date.

Second, try to make a "clean offer" without contingencies: if possible, schedule a pre-inspection before you make an offer and ask your lender to schedule an appraisal soon. No seller wants to accept an offer that falls through in a few weeks if the appraisal is lower than the agreed-upon sales price.

Third, explore homes ahead of their official listing through virtual tours so that you are able to submit the bid to buy the house of your dreams as soon as you see it in person. Know at what prices houses are selling to make an appropriate bid. In April 2021, 47% of US homes were on the market for less than one week before going "pending" (meaning that an offer was accepted). (We sold our house last fall. Of the seven couples who looked at it the first day it was shown, five couples sent contracts within one day to buy.)

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Fourth, have a good local agent who understands the local market who can present your offer professionally and promptly, and has a good idea at what price the house will sell.

Fifth, be prepared for a bidding war with a plan that allows you to act quickly. To avoid paying more than you can afford for a house that you want, review what you must have in the house ahead of time; identify what is non-negotiable and where you're willing to be flexible. Remember to factor any home improvement needs into your budget and figure out what can't wait and what projects you can do later.

Q: What advice do you have for sellers, as they look to make the most of this market?
A: As a recent home seller, I will give you some of the advice that I was given.

Number one, declutter your house. Quickly give away, toss or store much of what is in your house. The buyer wants to imagine his/her furniture and keepsakes in the house, and not to see yours. Have your closets and cabinets half-filled – not empty and not "stuffed."

Make sure the front of the house and the yard look great; first impressions are important.

Don't go overboard on remodeling or fixing up your house. Buyers may want to do their own changes, and usually will not want the "upgrades that you have made." Do schedule needed repairs. Perhaps get an optional home inspection to identify any issues.

Choose a good local agent who knows the area. Have professional photographs taken and an enticing description in the write up that advertises your house for sale. Location is everything; extol the excellent school district, for example. During the pandemic, houses in rural areas rose the most in value, mostly because they were low to begin with, but also because many families wanted to move away from cities with concentrated pockets of COVID-19 before the vaccine. (Buyers found it difficult to find a home in Dakota Ridge and Stonegate, Colorado, both south of Denver, and Linton Hall Virginia, west of Arlington.)

An interesting comment from Zillow is that the day your house is listed has an impact on how fast it sells and for how much. According to Zillow Economic Data Analyst Nicole Bachaud, if you list a house on a Thursday, you're more likely to get above your asking price. "Thursday is the best day to get a good price partly because more buyers are beginning to plan their home search for the weekend," she said.

Q: And, finally, what advice do you have for homeowners who aren't looking to buy or sell right now?

Are there things they should be mindful of even as they sit out the current buying/selling environment?
A: Today's sizzling housing market has generated fears of a housing price fall similar to the 2008 crash. While the 2008 drop was frightening (with almost 9.3 million borrowers losing their homes to foreclosure and short sale), today's market does not have many of the factors that led to the 2008 collapse.

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First, mortgage standards have improved. In the early 2000s, it seemed that as long as you were alive and breathing, you could qualify for a mortgage. Subprime borrowers, who did not make monthly payments on time, still qualified. Lenders did not verify the income of borrowers, leading to "liar's loans." Appraisals were often "drive by" – is there a house there? Ok; it appraises. But today, due to improvements in underwriting technology and quality controls, qualifying for a mortgage is tough.

Second, there is still a shortage of homes for sale. Many people who have lost jobs during the pandemic, have taken advantage of mortgage forbearance programs to stay in their homes. Many people have been reluctant to sell during the pandemic. Those two factors have contributed to the shortfall in housing for sale, especially "starter" homes. In 2008 there was an oversupply of homes for sale; the resultant falling prices put many new homeowners "under water," causing them to lose their homes.

Third, homeowners have equity in their homes. During the 2004-2007 bubble, many homeowners took out home equity loans to buy a second or third home. As prices fell, these owners found themselves in a negative equity situation; consequently, they "walked away" from their homes, leading to a glut of foreclosures and short sales, selling at large discounts, driving prices even lower. (I remember a website in 2008 youwalkaway.com that showed visitors how to walk away from their mortgages.) Today, more than 50% of homeowners have more than 50% equity in their homes.

Note that with higher home prices, rents are rising also. Average rents have risen 4% in South Florida in the past year. According to ApartmentList.com , "year-over-year rent growth now stands at 5.4% nationally, and prices are now in line with where we expect they would have been if the pandemic-related rent declines of 2020 never occurred."

Go to Smith Brain Trust for related content at https://www.rhsmith.umd.edu/research/smith-brain-trust and follow on Twitter @SmithBrainTrust.

About the University of Maryland's Robert H. Smith School of Business
The Robert H. Smith School of Business is an internationally recognized leader in management education and research. One of 12 colleges and schools at the University of Maryland, College Park, the Smith School offers undergraduate, full-time and part-time MBA, executive MBA, online MBA, specialty masters, PhD and executive education programs, as well as outreach services to the corporate community. The school offers its degree, custom and certification programs in learning locations in North America and Asia.

Contact:
Greg Muraski at [email protected]

SOURCE University of Maryland's Robert H. Smith School of Business

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https://www.rhsmith.umd.edu/research/smith-brain-trust
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