Bidding Wars Erupt as U.S. Supply of Homes for Sale Falls
Matthew and Carina Hensley offered $10,000 more than the asking price for a three-bedroom house in suburban Seattle, then lost out to one of seven other bidders.
Their $270,000 proposal last month came with a family portrait and a letter introducing the couple, their eight-month- old daughter, Harper, and their desire to build a family in the Renton, Washington, house with a yard backing onto a woody hillside.
Bidding wars, absent from most parts of the U.S. residential market since its peak in 2006, are erupting from Seattle and Silicon Valley to Miami and Washington, D.C. The inventory of homes hovers close to a six-year low, while an increase in jobs and record affordability are tempting more buyers. The number of contracts to buy previously owned homes jumped 14 percent in February from a year earlier, the National Association of Realtors reported yesterday.
“We understand there is going to be fierce competition in the offers made for your house but Carina and I both felt very strong about letting you know what it would mean to us if we were given the opportunity to live in your gorgeous and charming house,” wrote Matthew Hensley, 33, a credit union branch manager whose wife is a dental hygienist. Such letters from eager buyers were common during the housing boom.
While listings will probably rise as banks accelerate foreclosures and sellers gain confidence in the market, the U.S. metropolitan areas with the strongest economies may be ready to absorb the additional inventory, said Mark Zandi, chief economist for Moody’s Analytics Inc. in West Chester, Pennsylvania. Low values and interest rates have made buying a better deal than renting in 98 of the largest 100 metropolitan areas, according to Trulia Inc.
‘Better Times Ahead’
“The housing crash is finally giving way to recovery in an increasing number of markets across the country,” Zandi said in an e-mail. “The decline in unsold listings and vacant homes and the increase in rents presage better times ahead for single- family housing.”
The bidding wars seen in such places as Seattle aren’t found everywhere. In metropolitan areas including Atlanta and California’s Riverside and San Bernardino counties, housing remains weak as high unemployment and falling prices deter first-time and move-up homebuyers.
A contraction in supply hasn’t helped increase property values, which are down by a third from their July 2006 peak. Prices, hurt by discounted foreclosures and other distressed sales, will fall 2 percent more this year before rising 1.4 percent in 2013, according to a Moody’s Analytics projection.
Home prices dropped 3.8 percent in January from a year earlier, the S&P/Case-Shiller index of property values in 20 U.S. cities showed today. The measure is based on a three-month average, which means the January data were influenced by transactions in November and December.
A residential comeback would provide a boost to the U.S. economy. Housing will “contribute modestly” to the economy this year for the first time since 2005, according to Peter de Bruin, an economist at ABN Amro Group Economics in Amsterdam.
Rising demand for homes has cut into the supply, which is already low because many sellers -- especially those with negative equity -- are waiting for prices to increase before putting properties on the market.
Supply of Homes
About 2.43 million existing homes were listed for sale in February, the fewest for the month since 2005, the year U.S. home sales reached a record 7.08 million, the National Association of Realtors reported March 21. The number of listings rose by 100,000 from January, a seasonal bump that occurred every February since 2000 except for 2008, according to data collected by the Realtors.
The February supply of unsold homes listed for sale was down almost 50 percent from a year earlier in markets such as Miami, Phoenix and Oakland, California, according to Realtor.com, the National Association of Realtors’ official website.
The U.S. inventory of new homes stood at 150,000, a 5.8- month supply, in February, when new houses sold at an annual pace of 313,000, slower than analysts expected, the Census Bureau reported March 23.
The supply of new houses rose from 5.7 months in January “as builders put inventory in place for the spring selling season,” Stephen East, an analyst with International Strategy & Investment Group LLC in St. Charles, Missouri, wrote in a note to investors. “This is the fourth consecutive month inventory has remained below six months’ supply, which is broadly considered supply/demand equilibrium.”
The new-home supply peaked at 12.1 months in January 2009, forcing builders to book losses as the economy fell into recession. While the inventory has declined from that high, the housing market still has hurdles to overcome.
One hurdle for the residential market is the more than 11 million homes that had negative equity at the end of 2011, meaning more is owed on the mortgage than the house is worth, preventing owners from trying to market their properties, according to CoreLogic.
“A big issue is underwater borrowers,” said Sam Khater, senior economist for CoreLogic Inc. (CLGX), a real estate data provider based in Santa Ana, California. “If they want to move, they’re not flexible with their price. The lowest they can sell at is their mortgage amount. So there’s price stickiness.”
In a sign that demand for new homes remains weak, orders fell 8 percent from a year earlier for the quarter ended Feb. 29 at KB Home (KBH), a Los Angeles-based builder that targets first-time buyers.
“In a recovering market, the results did an absolutely ugly U-turn,” East, the International Strategy analyst, wrote in a note after earnings were released March 23.
The median existing-home price in the U.S. climbed 0.3 percent to $156,600 in February from a year earlier. It was the biggest year-over-year gain since July 2010, when President Barack Obama’s homebuyer tax credit temporarily boosted values.
“Prices are a lagging indicator,” Khater said in a telephone interview. “The key metric to look at are sales numbers.”
Existing homes sold at an annual pace of 4.59 million in February, up 8.8 percent from a year earlier and the busiest February since 2007, according to the National Association of Realtors. The February number was down 0.9 percent from January, when an unusually warm winter in much of the country helped increase demand, according to Paul Dales, senior U.S. economist for Capital Economics in London.
‘Demand Picks Up’
“Good weather does not generate extra housing demand -- it just brings it forward from future periods,” he wrote in a March 21 note to clients. “But the bigger point is that a genuine upward trend is under way, with sales 9 percent higher than a year ago and 13 percent above levels seen in July.”
Asking prices tend to be higher and inventory tends to be lower from March through May, while sales peak by June and inventory reaches a top in July, said Jed Kolko, chief economist for Trulia, a consumer-oriented real estate information service.
“As housing comes out of hibernation in the spring, demand picks up,” Kolko said in a telephone interview from San Francisco. “Prices peak early in the season and inventory peaks later. Buyers should be more patient, but sellers should move faster.”
Agents encountered multiple bids on about half of offers in Seattle, Boston, Washington, D.C. and Oregon this year through March 15, said Tim Ellis, real estate analyst for online brokerage Redfin. In the San Francisco area, Redfin agents reported that three of four offers involved competition, he said.
One home in Palo Alto, California, received 38 offers and sold for $1.65 million, or $452,000 more than its asking price, said Ken DeLeon, a real estate broker in Silicon Valley since 2002. Another client paid $2.56 million for a home in 2007 and is listing it for $3 million, with the expectation of receiving higher offers, he said. The seller wants to use the proceeds to buy a home in Saratoga, about 18 miles southeast of Palo Alto, where the market hasn’t heated up yet, DeLeon said.
Prices are hitting all-time highs, above Palo Alto’s 2007 peak levels, in the 94301 and 94306 ZIP codes, as buyers rush to purchase in advance of an expected flood of newly minted millionaires when Facebook Inc. (FB) has its initial public offering, DeLeon said. The Menlo Park-based social-networking company filed paperwork in February for an IPO that may result in a market valuation of $75 billion to $100 billion.
‘Hottest Housing Market’
“It’s insane,” DeLeon, who brokered 101 home sales last year valued at $275 million, said in a telephone interview. “It’s probably the hottest housing market in the nation.”
In Phoenix, total listings as of March 23 were down 43 percent from a year earlier to 21,346 homes on the market, according to the Cromford Report, a Phoenix-area market research service. When pending sales are excluded, the number of available homes on the market fell 55 percent from a year ago. Distressed offerings dropped more, with the number of short-sale listings down 84 percent and bank-owned homes off 80 percent.
The average home’s time on the market fell to 90 days from 114 a year earlier, and the median sale price rose to $126,000 from $110,000, according to the Cromford Report.
Shopper Sentiment Improves
Contributing to the higher prices and faster sales pace in Phoenix were high investor-buying activity, normal homebuyers attempting to enter the market, speedier short-sale processes and an improvement in shopper sentiment, said Mike Orr, publisher of the Cromford Report. In a short sale, a property is sold for less than the amount owed on it.
“The inventory decline is accelerating,” Orr, who’s also director of the Center for Real Estate Theory and Practice at Arizona State University’s business school, said in an e-mail.
The key ingredients are in place for a housing recovery in the strongest U.S. job markets, where sales are outpacing new listings and banks have worked through the backlog of foreclosures, Douglas Duncan, Fannie Mae (FNMA)’s chief economist, said in an interview.
The unemployment rates have fallen over the past year by more than one percentage point in the Miami, Phoenix, San Francisco, Seattle and Washington, D.C., areas, according to Bureau of Labor Statistics data.
Listings in Washington fell 27 percent from a year earlier in February, while the median price rose 11 percent to $398,500 and homes sold after an average of 74 days on the market, a 20 percent decline, according to Metropolitan Regional Information Systems Inc., a real estate listing service in Rockville, Maryland.
‘Pricing a Little Low’
In neighborhoods such as Capitol Hill, sellers are prompting bidding wars by asking less than they expect to receive, said Sean Aalai, an agent with Lindsay Reishman Real Estate.
“They’re purposely pricing a little low,” Aalai said in a telephone interview. “Buyers walk in and fall in love and the property starts getting bid up.”
Single-family home prices in the Miami area increased 19 percent from a year earlier to a median $175,000 in February, the third consecutive year-over-year increase, the Miami Association of Realtors reported March 21.
The number of listings fell to 5,061 in February, or about six months’ supply, down from a nine-month supply a year earlier, as foreign buyers joined out-of-staters and Floridians seeking to take advantage of low prices, said Ron Shuffield, president of Esslinger Wooten Maxwell Inc., a real estate firm in Coral Gables, Florida.
‘Best Spring Season’
“This has been the best spring season since 2005,” he said in a telephone interview. “The entire world’s buying here. They love the weather.”
The Miami-area inventory of homes selling for less than $100,000 fell to less than three months’ supply in February as investors snapped up low-cost properties and the availability of bank-owned homes shrank as lenders slowed the pace of foreclosures, Shuffield said.
Listings may swell in coming months as lenders allow more foreclosures to flow onto the market. The top U.S. mortgage servicing banks, which agreed to a $25 billion settlement over foreclosure abuses last month, slowed the pace of foreclosures as they negotiated for more than a year with state attorneys general.
Foreclosures to Come
A shadow inventory of an estimated 1.6 million homes either facing foreclosure or already repossessed by banks was being held off the market in January, little changed from a year earlier, CoreLogic reported March 21.
“As we move into what is traditionally the peak selling season for real estate, servicers will certainly be watching closely to see if now is the time to move more inventory out of the shadows,” CoreLogic Chief Executive Officer Anand Nallathambi said in a statement.
Many states that don’t require court approval for foreclosures have worked through much of their shadow inventory. In Arizona and California, where banks take less time to repossess and resell foreclosures because the process doesn’t require judicial review, 7 percent of mortgages were delinquent at least 90 days or in foreclosure in the fourth quarter, down from about 13 percent in 2009, according to the Mortgage Bankers Association.
In Florida, where the court system is clogged with home seizure cases, 18 percent of houses with a mortgage are in the foreclosure pipeline, compared with 20 percent in 2009, the Mortgage Bankers Association reported. In other states that require judicial review, such as New Jersey and New York, the number of homes in the pipeline increased.
Time to Move
“If the foreclosure process has moved efficiently so that whatever problem there was has been taken care of, you’re going to see price appreciation as long as employment is growing,” Fannie Mae’s Duncan said in an interview.
For the most part, sellers are marketing their properties because of life changes, including taking a new job, getting a divorce or having their grown children move out, Khater said.
A four-bedroom home on 1.3 acres (0.53 hectare) in the Detroit suburb of Bloomfield Hills, Michigan, went on the market in October, when the owners decided to “downsize,” said Barbara Nigro, who has lived in the house since 1976.
“Now it’s time for another family to move in and raise their children there,” she said in a telephone interview from Scottsdale, Arizona, where she and her husband own a winter home.
The Nigros dropped their asking price by $150,000 to $950,000 in January, according to the listing. An offer is pending.
“Maybe if I kept it for two more years I’d make more money,” said Michael Nigro, 71, a retired pediatric neurologist. “I don’t have the patience for that. I don’t want the responsibility.”
Lori Bakken, the agent who represents the Hensleys, said three of four bids she submits on behalf of buyers face competition. She said she expects the dearth of supply to be temporary.
“As word gets out there that there is a lack of inventory, I believe sellers will seize on that opportunity,” Bakken said.
The Hensleys haven’t given up on living in the Renton, Washington, area, where both sets of parents live. The winning bidder offered $15,000 above the asking price and didn’t make the sale contingent on successful financing or inspection, according to Kimberly Hobbs, the Seattle broker who represented the seller.
“From this experience we learned that we have to move fast, especially if a house is nice,” Matthew Hensley said. “The competition is fierce out there.”
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