How will bidding wars for homes play out in the coming year?
Some economists and other housing experts say the stampede may slow, but not right away.
“Bidding wars will likely continue into 2013,” said Svenja Gudell, senior economist at online hometracker Zillow.com. “The supply of homes is substantially reduced from year-ago levels and investor interest, together with increasing consumer confidence, is strengthening demand.”
She also noted that the housing mix has been changing. The market now includes fewer foreclosures, with the discount gap significantly narrowing between bank-owned properties and standard sales.
Jed Kolko, chief economist at Trulia.com, said rising prices will be a big factor in any expanded housing inventory: “The stronger the price increases are next year, the more homeowners might consider selling.”
Homebuying also could be affected by new rules regarding mortgage risk. The rules, to be announced by the Consumer Financial Protection Bureau in January, will define which mortgages are judged to be beyond a borrower’s ability to repay, Kolko wrote on Trulia.com.
“These rules will need to strike a delicate balance between protecting consumers from the types of high-risk loans that contributed to the last crisis and giving lenders the incentive to expand mortgage credit,” he wrote.
Dennis Smith, a mortgage broker in Huntington Beach, said he thinks the surplus of buyers over sellers will continue into the first quarter of 2013 “for certain.” However, he sees move-up sellers listing their homes as they appreciate and gain equity, leading to a more balanced market.
He also thinks an influx of foreclosures could hit the market when adjusted-rate mortgages (ARMs) go up.
“Long-term there still exists a tremendous amount of homes that have ARMs that have been enjoying incredibly low rates, below 3 percent,” said Smith, co-owner of Stratis Financial. When rates rise, he said, if those homeowners lack equity or can’t refinance, a round of ARM foreclosures will hit the markets — boosting supply.
“This scenario is most likely to occur late in 2013 or early 2014,” he said, “if the economy starts to roll and rates climb.”
The frenzied competition among homebuyers may have a downside beyond inability to snag a property.
“Bidding wars do have the potential to create artificial prices,” said Gudell of Zillow. “Buyers can experience buyer’s remorse and end up bidding too high in the heat of the moment. There is a trade-off between buying and renting and those lines can get blurred during a bidding war, where it might have been more advantageous for a buyer to rent in the end.”
Whether bidding wars have a negative effect on the housing industry depends on why they exist, Kolko said. “If there’s strong demand and tight supply then many homes might be underpriced,” he said. “Since we’re coming out of a long downturn in the housing market, many sellers may be underestimating what they could get for their home. The bidding wars might just be reflecting people’s beliefs about prices catching up to the new reality.”
Will rapidly bid-up prices create an artificial climate?
“Bubbles do form quickly,” Kolko said, “but I think a lot of people are still scarred by the most recent crisis, which in many places still isn’t over.”
