It's a high demand low supply time so prices increase and interest rates don't have much to do with that.
This doesn't tell the whole story. Low interest rates don't make people offer 150k over asking while waiving all contingencies. I'm closing on a home soon and I saw this kind of stuff. I myself went 25k over with all contingencies waived on a condo in a 100 year old multifamily building. Relatively speaking, I was quite lucky to get this condo for this cheap.
There's a legitimate demand here: people, like myself, who renewed a lease on a tiny apartment shortly after the pandemic started then spent a miserable year indoors. Informing each other of your meeting schedule so you aren't loud in the kitchen while your partner is presenting in a meeting. Wishing your relaxation space wasn't the same as your work space.
I'm now roughly doubling the square footage of my living space, adding a garden and a patio. I'm thrilled. And yeah, I'm paying a million bucks for it.
Paying above offer always struck me as strange. In my housing market its very common as well, to the point I believe under-pricing the home is intentional. There's no reason the home should be priced considerably below the market price. Sometimes you get it wrong but homes consistently selling above ask tells you the sellers are under-pricing intentionally. The upside for the seller is that bidders enter blind bids where the top bidder could bid significantly higher than the next highest bid.
I think systematic under-pricing could happen when prices increase a lot in a short period and it takes the brokers a while to adjust their pricing as the trend becomes more clear. But it could also be cultural to a market where brokers feel comfortable under-pricing homes to encourage a bidding war, but that obviously doesn't work in all markets.
As for waving contingencies, that's just another form of incentive in lieu of cash.
Partially because you comp against recent sales in the area to determine market rate, it takes a while to close so the comps you have available are usually a few months old, and the price moved a lot in a few months
This happened to me multiple times. Recent sales as late as January suggested X could win this house, I put in an offer at X+15, I'm later contacted that there's an offer at X+50 and I can put another bid in if I want to one up them
Of course in this example X is already over asking so you're right I think that this is done intentionally.
I would disagree with the part about the bidding war. Purchasing works more like a blind auction. Everybody puts in one bid on the offer date. Often buyers agents will avoid situations that can turn into a bidding war, and I got the sense that shopping offers (by sellers) is considered bad form among agents and can lead to reputational damage.
Imo widespread underpricing has more to do with getting eyeballs on Zillow, Redfin, Trulia, etc. People set list prices to show up in searches.
You don't need to be a citizen of this country in order to buy our land? Just money, and a email will buy a house.
The federal government could stop some of the insanity of buying a home, if they just made it a bit harder for foreigners to buy our land?
Isn't the federal governments purpose to put Americans first?
Also would this have any affect outside of places like Manhattan?
You could campaign to change that, but since it goes strongly against the free market and countries like money it's unlikely to go anywhere.
I fully empathize with how you feel, and I see the same sentiments in various countries. But I think it’s important to not bring the immigrant straw man into this discussion, when it is easily shown that the problem is much much larger than that. Institutions and investors are the real perpetrator, not an immigrant middle class.
The only other country I've specifically looked at, Mexico, only has restrictions on non-citizens owning land near coasts or international borders, for the vast majority of the country anyone can buy land.
And because getting the % deposit is a big factor in whether you can afford a house, it pushes lower income people out of the market.
And if you bought in 1980, the high rates kept the lid on prices. However while you may have started with the same payment but the rates have been steadily ticking down since then. Creating a massive generation gap between those who bought while rates were high and those who didn't have the opportunity.
And I am sure this is only one of the factors in housing affordability but in my fairly uneducated opinion it seems like the largest.
Median downpayment is 6%, a common low end is 3%, some places and programs go lower. Median house price sold in 2020 was 347k, well over 25% of houses sell for under 250k [1].
So, for a starter home, saving 3% of say 200k is 6k. If someone can pay this mortgage without killing themselves (30%, say 4%, monthly payments ~1K) then they can save a 6K downpayment over a reasonable time. So downpayment should not be keeping many people out of homes that want one that can afford a mortgage.
If their income is so low that they cannot even afford a mortgage, then yes, they are pushed out of the market, but there is no way they could enter anyways.
[1] https://www.census.gov/construction/nrs/pdf/quarterly_sales....
Not if they are paying rent - there would be no surplus every month to save.
IF someone is so on the edge that they have zero extras, then they should not get a mortgage, because they're one hiccup away from losing it all.
This is why I put in the phrase "without killing themselves."
And, if you want to save that 6K mortgage downpayment, downsize life by a little - it really is not much to do. If you're so poor you cannot do this, there are federal programs to assist.
Again, this is a non-issue for pretty much every person that is also capable of paying a mortgage.
I am surprised at how crazy low those US ratios are. Thats just bonkers.
So, what a lot of people do is either just eat that extra cost (for lower cost homes, it more or less comes out to the equivalent of an additional 0.8-1%) for the life of the loan, or refinance out to a conventional loan once they're below 80% LTV.
There is also the shady case of the 80/20 Mortgage. Basically, you take out one 'primary' mortgage for 80% of the home's value, and then a second mortgage or HELOC on 20% of the rest.
This can in some cases be cheaper, but arguably goes against the whole spirit of PMI in the first place. (Not saying I don't have issues with the way PMI/MIP works...)
And in the US, below 20% you get an extra insurance called PMI.
Sounds like the two countries work the same because money works the same.
Here in the UK you can't even get fixed rate mortgages of more than 10 years and all of those require substantial deposits.
>20% down is where the best interest rates are.
Most people are on variable rate deals or short term (2 year) fixed deals.
Median house prices in the UK are something like 8x median incomes, and banks will only lend a maximum 4-5x earnings. This means average Joe need to save something much closer to 3/8ths, not 5%
As a real world example based on my current circumstances:
- At rough ballpark property prices, with ~15% down, market mortgage rates are about 3.5%.
- At 3.5%, with most I am comfortable paying every month (about 40% more than my current rent), I can only borrow around ~60% of what I need to buy the kind of home that I want (and rent now). On paper this means I have to save 40%.
- However, reality is somewhere in the middle. If I have 25% to put down, mortgage rates drop dramatically to 1.5%, allowing me to afford the same home.
So the long and short of it is you realistically need 20-25% here in the UK.
Over the life of a loan the interest portion is negotiable while the principal payments are not. A buyer in improving financial circumstances can accelerate payment on the principal and avoid future interest payments. The buyer could also refinance if interest rates came down.
Interest payments in the US were also tax deductible while principal payments were not. This preserved some purchasing power early in the mortgage when interest dominated the payment. Renters can deduct both interest, depreciation and upkeep while homeowners can only deduct interest. Lower interest rates skew the market more towards renting versus buying.
The result of lower interest rates is that today’s buyers are making a very different financial bet then buyers over the last 50 years. The only option buyers have to avoid payments on principal is to default. They won’t be able to accelerate repayment and reclaim future purchasing power like previous generations did.
For those that think buying a house is a good hedge against inflation, it is worth considering that the best tool to combat inflation is to raise interest rates. And considering most buyers budgets are created by working backwards from the monthly payment that they can afford, higher rates naturally translate to lower prices.
And as you alluded to, in a rising interest rate environment, there are no more "escape hatches" for folks that might be struggling to make ends meet. In a rising rate environment, refinancing is off the table, selling might be off the table if you are underwater on the mortgage, etc...
I have been waiting for an opportunity to buy for quite a while now. It has always felt like our household income was a few ticks too low to comfortably afford anything but the dregs of the market. And as our pay increased, the market would rise another 20% and slip out of reach again. And right now I am seeing a few niches in the market that might work for our budget, but the interest rate situation has me spooked, so once again, I am leaning towards sitting this one out. I guess on the plus side, I can buy cryptocurrency at a 100-1 leverage ratio which was something that wasn't available to my parents generation!!!
Big second order effect of a potential housing crash: There's a non-negligible part of the population that uses their homes as their own lines of credit. As their home increases in value, they occasionally will do a 'cash-out' refiance of their property. Or will open up a HELOC. If the market tanks, people who rely on this tactic will find themselves in a crunch quickly.
If you're willing to spend a minute or two on me, please say so.
You can email me at mac@quartyard.us
or message me on twitter @mac01021
or we can go off topic and talk right here!
One specific circumstance of the UK is a tax break introduced last year to incentivise home buying. Beyond that, as others pointed out, some shared causes are more people on the market for a new home due to the pandemic, and historically low interest rates.
[1] https://www.theguardian.com/business/2021/may/26/value-of-uk...