WRITTEN BY: MAX FITZGERALD
FEBRUARY 2022

For over a century, the predominant way to sell a home in Australia has been by auction. The appeal of an auction is that homeowners believe they can get a higher price by forcing buyers to compete against each other in a bidding war.

In the US, homes are not sold by auction. Yet, talk to any buyer over the past 12 months and they would agree that the home buying process feels more like an auction than the conventional way of buying a home. With today's extremely limited inventory and immense buyer interest in seemingly every home that comes to market, a bidding war develops.

With interest rates swiftly on the rise, will the market finally have a chance to cool down?

Going, Going, Gone!

Ultra-Low Interest Rates

Initially, record low mortgage rates paved the way for white-hot buyer demand. Ever since COVID was declared a pandemic in March 2020, mortgage interest rates hit 17 record lows, with the lowest rate of 2.65% reached during the first week of January 2021.

As of recently, rates have dramatically climbed from 3.05% on December 23rd of last year to 3.55% as of February 3rd. That's half of a percent in a very short period of time, and they are poised to rise further as the U.S. economy continues to improve.

Severe Inventory Shortage

While historically low mortgage rates had been the catalyst for this competitive housing market, a severe lack of available homes to purchase has been the perpetuating factor. Over the last 24 months, active housing inventory in the U.S. has plunged to record lows that has only exacerbated the housing crisis.

To put today's inventory levels into perspective, the 3-year average of available homes to purchase prior to the pandemic (2017 through 2019) was roughly 110% more homes available for sale. There are simply not enough homes available to match buyer demand.

With Rising Rates, Buyer Demand Continues to Be Strong

Over the past 12 months, buyer demand has been keeping pace with the supply of available homes to purchase. Homes that are coming on the market are like a revolving door, flipping into escrow nearly as fast as they come on which ultimately does not allow the inventory to build.

Almost every home that is listed for sale is inundated with showings, and, if not priced ridiculously out of bounds, usually generates plenty of offers.

With so much buyer competition, sellers get to call all of the shots. Buyers have been willing to wave inspections, waive the appraisal contingency, offer a 60-day rent back, and close in a timeframe that is most suitable for the seller.

How Long Will This Market Continue?

The auction-like atmosphere will continue if inventory remains at ultra-low levels. Higher interest rates are not yet deterring buyers from purchasing, but if they continue to rise, it will be a totally different story down the road.

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The Bottom Line: Carefully pricing a home is crucial to obtaining the best outcome regarding price and terms.

Pricing at or slightly above the last comparable pending or closed sale will expose the home to the largest buyer pool. The auction that follows will have buyers competing against each other to achieve success. This results in sales prices above their asking prices.

Stretching the initial asking price considerably above the comps may still result in achieving the ultimate goal in selling. However, it will be at the expense of not obtaining the highest and best price and terms.

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