Bidding wars to return as inventory declines

February 18th, 2015

Fewer homebuyers are making all-cash offers, which could help with bidding wars in the competitive market the NAR believes will come soon.

A key characteristic of the early housing market recovery was many consumers were ready to purchase homes, but few properties were available, leading to a competitive buying environment. As the recovery continued, inventory levels increased, but a recent report from the National Association of Realtors (NAR) showed bidding wars will be coming soon.

In the final quarter of 2014, the supply of available homes was 4.9 months. In comparison, normal conditions, when supply and demand are even, have a supply of six or seven months. Chief Economist Jonathan Smoke said this undoubtedly indicates the market doesn’t have enough homes for prospective buyers.

Price gains signal tight inventory
Smoke went on to note lower inventory pushes up home prices. As many homebuyers compete for few homes, their rising bids ramp up sale prices. This in turn increases the appraised value of other houses for sale in the area, as valuations greatly depend on the sale prices of nearby comparable properties.

NAR data showed this price growth has already started, with the median price for an existing single-family home jumping 6 percent year over year in the fourth quarter of 2014. For buyers, this indicates a need for more spending power as they enter the market. On the other hand, this market activity is beneficial for prospective sellers.

“This should signal existing homeowners, who may have been slow to think of selling, to consider now a great time to list,” Smoke said.

How to keep the market balanced
NAR Chief Economist Lawrence Yun said new home construction must improve if the market is to remain balanced and spread out demand. This solution may come to fruition, as indicated by data from the U.S. Commerce Department. In December 2014, private residential construction spending went up 4.1 percent year over year, rising from $336.2 billion to $350 billion. As homebuilders put more money toward new projects, housing inventory may see some relief.

If inventory does tighten, homebuyers have one point of solace, as CoreLogic data showed the share of all-cash home sales dropped in November 2014. In a competitive market, bidders who can pay in cash typically have the upper hand, as cash appears as more of a guaranteed payment than a mortgage-dependent borrower. As all-cash buyers have less of a presence in the market, other buyers can be on equal footing with more of their competition.