Forget Lowballing: Bidding Wars Return in Hot Housing Markets

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Are buyers being manipulated into overbidding for the relatively few attractive homes on the market?

Earlier this year, the National Association of Realtors (NAR) announced that the number of homes for sale in the U.S. had reached a low not seen since 1999. More homes have hit the market since then, but Lawrence Yun, NAR’s chief economist, said in March that in many areas around the nation, the inventory of homes for sale is unlikely to keep up with the number of interested buyers.

“Buyer traffic is 40% above a year ago, so there is plenty of demand but insufficient inventory to improve sales more strongly. We’ve transitioned into a seller’s market in much of the country,” said Yun. “We expect a seasonal rise of inventory this spring, but it may be insufficient to avoid more frequent incidences of multiple bidding and faster-than-normal price growth.”

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Bidding wars have been commonplace in Connecticut this spring, especially for mid-range properties ($300K to $600K), reports the Hartford Courant. Buyers are reportedly frustrated by “the slow trickle of new listings,” and “they are ready to pounce,” according to a local realtor, when an attractive property in their price range comes onto the market.

Bidding wars have also been popping up in cities such as Denver, where half of new homes on the market have been selling in under 30 days. CNN Money recently noted that nine in 10 homes in hot markets in northern and southern California have attracted bidding wars, as have at least two-thirds of properties in Boston, New York City, Seattle, and Washington, D.C. “The only question is not whether a new listing will get multiple bids but how many it will get,” one agent in the Sacramento area explained.

But is the increase in multiple bids a sign of a hot housing market — or one in which underpricing has become the standard?

A bidding war is a sign that the home is probably underpriced—and the truth is that many new listings are just that, on purpose. “Most people are not pricing at market value,” one agent in San Francisco recently told the San Francisco Chronicle. “Even in this market you don’t want to overprice.” With that in mind, the agent brought up the example of a two-bedroom townhouse in the Menlo Park area: “A similar one sold a year ago for $675,000 so we priced slightly below that at $659,000.”

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Why underprice it so? “We priced it intentionally to get multiple offers and sell quickly,” the agent explained. Some view underpricing as sleazy, in that buyers can feel manipulated into a battle of one-upping the competition, without a clue as to what price the sellers realistically expect. Underpricing can also backfire on sellers, of course, if no one bids over asking price. But in the instance mentioned above, the strategy worked, as so often is the case in the hottest housing markets. The townhouse wound up attracting nine offers (all financed, no cash bids), and sold for $755,000, or 15% over asking price.