‘I’ve lost bidding war after bidding war’: A ‘hellish’ imbalance in the real estate market is frustrating buyers

By Aarthi Swaminathan

If interest rates are so high, why haven’t house prices gone down?

The housing market is out of balance.

The process of buying a home can be painful, and the unpredictable and counterintuitive dynamics of the current real estate market aren’t helping.

In fact, perhaps to be painful would be an understatement.

“It was one hell of an experience,” said Odeta Kushi, who bought a home with her husband in the DC area last year. One of the houses she had bid on ended up receiving 19 other offers. “It was a house I really loved,” she said.

When Kushi started looking for a home two years ago, she found exactly the neighborhood she wanted. It had a semi-suburban vibe, was in DC, and had a good school district in case she wanted to expand her family.

Kushi, assistant chief economist at First American, has spent much of her career developing a model that can estimate home values. So she knew how much to bid and, crucially, when to pull out of the bidding process.

Back then, mortgage rates were around 2.9%, half the level of 2023, making homebuying even more enticing. And yet Kushi knew it wasn’t going to be easy.

“I lost bidding war after bidding war,” she told MarketWatch, “because I knew exactly what I was going to pay.”

In 2021, interest rates were relatively low, competition among buyers and selling prices high. In 2023, interest rates are high, but so are selling prices — and there’s still stiff competition for home buyers.

Bidding wars are back in earnest. In fact, they never really went away. The housing market has slowed over the past two years, but rising interest rates haven’t caused prices to drop much. So what’s up?

Buying a home is an emotional experience, so missing out on a home you care about can be heartbreaking. “Housing has given me a lot of heartache because you get stuck on these houses,” added Kushi.

A couple of times when it seemed like the deal was on, a last-minute buyer would walk in and offer “something absurd that went beyond our expectations,” Kushi said. “Everything is fine in terms of love and housing,” she added.

It’s been a year since she closed and moved into her new home. Since then, the prospects for buyers have only gotten worse: the 30-year mortgage rate has doubled in the last two years and is now marching towards 8%.

A standoff between buyers and sellers

Aside from the homeowners who either bought a home on an extremely low mortgage or refinanced to secure that low interest rate, most Americans – from renters to investors to economists – are equally confused and frustrated by the development of the US housing market.

Home sales are declining, mortgage rates are at their highest in 22 years, yet the market is still out of reach for many: house prices are still high, with the average resale price exceeding $400,000.

However, the biggest problem facing the housing market right now is an imbalance between current homeowners and prospective homeowners: there is a serious mismatch between incentives and motivations.

Traditionally, most home sales involve homeowners selling their homes to buyers. However, these days, homeowners don’t feel the need to sell unless they have to for personal reasons, as they likely have low mortgage rates.

Affordability has fallen. As they move, they will find that while they may be able to sell their home for a higher price than when they bought it, they may only be able to afford a smaller home or a similar-sized home in a less attractive neighborhood.

To make matters worse, buyers have fewer real estate offers to choose from. They turn to developers who offer new homes and even mortgage interest buybacks to make home ownership a little cheaper. But the builders cannot cover all the needs. They also don’t want to build too much since they were bitten once during the Great Recession.

Some renters have persevered and embraced the “date the rate, buy the house” mentality, choosing to buy a home that fits their criteria now and refinance later in life.

But for many other tenants, the calculation makes no sense. According to Realtor.com, the median rent for a two-bedroom home in the United States was nearly $2,000 as of July 2023. In the same month, the average list price of a home was $440,000 — or more than $2,220 for principal and interest payments alone.

While the real estate sector has been profoundly affected — sales are “at rock bottom,” Redfin CEO Glen Kelman told MarketWatch this month — house prices have remained flat, to the disappointment of many.

Given that rising home values ​​are having widespread implications for how housing costs are calculated in government inflation measures, some economists fear the resilience in home prices means there is still a long way to go before the US economy cools.

“We’re in uncharted territory,” Andrew Levin, a former Federal Reserve economist, told MarketWatch. “We’ve never had such a sharp and sustained increase in mortgage rates as we have in the last year and a half.”

Even homebuilders, who are seeing a surge in demand from homebuyers, are concerned that high interest rates could depress demand. They’re already noticing traffic from potential buyers dropping and building some smaller, less expensive homes

The bottom line: Housing inflation is likely to “stay high for a long time,” Levin added.

Some analysts sound confused and frustrated. “Real estate should be re-evaluated,” Drew Matus, chief market strategist at MetLife, told Bloomberg Surveillance in mid-August. “The fact that this is not the case is not a sign of health,” he added. “It’s a sign of dysfunction.”

Others have changed their minds about a price correction as homebuying demand has remained stronger than expected despite higher interest rates. Goldman Sachs (GS) said in August it expected house prices to rise 1.8% in 2023, downgrading its earlier forecast of a 2.2% decline.

One economist described the current situation as “a tale of two real estate markets”. Michael Reid, US economist at RBC Capital Markets, wrote in a note that the data shows a divergence between existing home sales, which have stalled, and new home sales, which have surged.

The cost of “housing,” or housing, is one of the key components the Federal Reserve uses to measure inflation. One of the Fed’s main jobs is to keep inflation at a low and stable pace — its target is 2% — so that any major increase in the cost of living provides a greater incentive to raise interest rates.

When the Fed hiked interest rates last summer, it caused mortgage rates to rise and dampened home sales. After raising interest rates in 11 of the last 12 policy meetings, most economists believe the next policy meeting in September is less likely to raise rates. In fact, the chances in the financial markets go to almost zero

However, with annual inflation at 3.2%, largely due to high housing costs, the Fed may not be ready to hike rates just yet, and more broadly, there may be scope for mortgage rates to rise. That would be bad news for both the real estate industry and homebuyers.

What happened after interest rates hit 18% in 1981?

The fact that the housing market appears to be out of whack isn’t just because first-time homebuyers — Millennials and Gen Z — are bemoaning higher interest rates and home prices. Older generations may point to higher tax rates, dismissing this as something younger generations simply have to accept. A new normal, if you will. After all, mortgage rates peaked in 1981 at 18%.

But Kushi said there was something people should consider about what happened in the 1980s: monetary policy became extremely tight before inflation improved. “From December 1979 to January 1980, interest rates soared as the Federal Reserve fought the ‘Great Inflation,'” she said. “As mortgage rates shot up to unprecedented levels, homes became significantly less affordable and home sales and new construction fell.”

But by October 1982 inflation had fallen to 5%, she added. The Fed lowered interest rates, which meant the interest rate on 30-year mortgages fell as well.

Kushi’s analysis of the 1980s, which she believes was a time when the real estate market went into recession much like it is today, suggests that while the current real estate market may be in a dire state, it will remain so until the Fed hits its target inflation rate or something. Otherwise the economy will slow down even more.

In the meantime, the typical homebuyer may finally have to put up with higher than average interest rates. Reid, the RBC economist, found that at current interest rates, a middle-income family’s monthly mortgage payment would be 28.5% of their total salary. “That’s the highest percentage in the last 30 years,” Reid wrote, “and well above the sub-20% percentages we’ve seen in the previous decade.”

And it may take a while to correct the imbalance — or dysfunction — we’re seeing in the real estate market. With the economy and job market strong, the Fed is unlikely to cut rates anytime soon, Levin said; The Fed may have to raise it even further.

“It doesn’t seem very likely to me that mortgage rates are going to drop much anytime soon,” he added. “So the housing market that we’re seeing now is probably the housing market that we’re going to see for quite a while.”

Meanwhile, Kushi had some advice for those still in the middle of looking for an apartment: stick to your gut feeling. Her concern was not to pay too much for a house.

When Kushi planned to buy a house, she was very careful with her finances to estimate the couple’s budget. “I had spreadsheets and spreadsheets and spreadsheets, budgeted everything, how it would affect that part of my discretionary spending, and what interest rate I was willing to pay,” Kushi said.

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8/26/23 1736ET

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