Navigating a Hot Housing Market

NerdWalletApril 27, 2016
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You go to an open house and find more than 20 people checking the place out. Your offer competes against 13 others. The house sells for $130,000 above asking price, in cash, with no contingency clauses.

There are real war stories like this from hot real estate markets, where home inventory is low and the competition high. Although buying a home in a strong seller’s market can present added challenges, it’s still possible to secure a place you’ll love.

How to spot a hot market

The easiest rule of thumb to figure out whether a housing market is hot is to look at months of unsold inventory currently on the market. Generally speaking, an inventory level of four to six months is considered balanced between buyers and sellers. Less than that is considered a seller’s market. More than that favors buyers.

The country as a whole averaged about 5.5 months of inventory for the 12-month period ending March 2016, according to the U.S. Census Bureau. But some hot cities have seen historically low inventory. The San Francisco, Denver and San Diego areas, for instance, have recently had only two to three months of unsold inventory, making these markets among the country’s hottest.

Once you determine your market is hot, you might want to consider whether it’s overheated. Experts use various criteria to get at this. But one way you can get an idea of this is use a rent vs. buy calculator. This can tell you how long you’d have to live in a home you bought to make it less expensive than renting, based on the costs of buying and renting. That said, this won't show you local details, like historical and anticipated appreciation.

If you’re trying to buy in a hot market, follow these tips:

1. Window shop

If you can, spend some time looking over what’s available before you get serious. Scan your favorite real estate website for new listings every day. Tour open houses. But don’t fall in love at first sight — doing so will lead you to overlook problems and, if you wind up making an offer that’s declined, suffer heartache. We know, it’s easier said than done.

The idea is to get a handle on the local market without the pressure of feeling like you need to make an offer. You’ll also learn more about the kinds of homes and neighborhoods you like, or don’t, and which features matter to you.

2. Get a good real estate agent

Having a good agent is particularly important in a hot market. You want someone who hears about listings as soon as they hit the market, or before. Also, a good agent knows how to make your offer stand out.

Good buyer’s agents have a track record of winning more than half of their offers, according to Edward Krigsman, a broker with Windermere Real Estate in Seattle, another hot market. They keep track of a changing repertoire of tips and techniques, and have built up relationships with listing agents.

Two-thirds of homebuyers say they interviewed just one real estate agent. We suggest talking with a few agents. Ask them how they’ll help you find a home and put in a winning bid. Get names of previous clients and check those references.


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3. Decide where you can compromise

Some buyers see a dated kitchen and run for the door. That’s less competition for you. Finishes and appliances are easy to change. Also, finishes and architectural styles go in and out of fashion. Midcentury modern, for instance, was hot in 2015, after decades as a niche interest. Granite countertops are giving way to other materials. But it’s hard to change a floorplan, and you’re stuck with the location.

That said, if you absolutely, positively don’t mind living on a busy street or smaller lot, or beside a commercial area, you could get a deal in a neighborhood you otherwise wouldn’t be able to afford. Just be sure, because what seems like a small annoyance now may well grow over time.

4. Get your financing lined up

Talk with several lenders or mortgage brokers, and get a mortgage preapproval. Official Loan Estimates will help you compare interest rates and costs, but in a hot market, you’re also looking for someone with a reputation for closing loans quickly, and delivering on promises. This leads to …

5. Offer a quick closing

Some sellers are in a hurry. Find out what the standard closing time is and see if you can put in an offer that would close more quickly. This might be a tiebreaker in your favor. Sellers might even accept a slightly lower offer to get the deal done fast. Sometimes, using a lender that has an established relationship with your real estate agent can help ensure a quick closing.

6. Get a pre-inspection

Once you find a home you want to make an offer on, have an inspector look it over. This could be a full home inspection or a more cursory version to reveal problems that would steer you away from buying the home or, at a minimum, significantly impact your offer price. In a competitive situation, the seller is unlikely to agree to fix minor problems.

The pre-inspection will allow you to make an offer that is not subject to an inspection contingency. In a hot market, offers with such a contingency stand little chance.

Many sellers in a hot market will set a specific day for accepting offers, to give buyers time to get pre-inspections and assemble their bids.

7. Waive other contingencies

If you can, waive other contingencies, such as for financing. In a hot market you can pretty much forget about an offer that’s subject to selling another home, for instance.

Even if you need to get a mortgage, you can waive the financing contingency. That means that, if your financing falls through, you lose your earnest money. In such a case, it’s important to stipulate that a lender’s appraiser can access the home — otherwise you won’t get a mortgage.

You want to be careful about waiving contingencies, because they exist to protect your rights — and your money.

8. Be nimble

Agents in hot markets often present offers in person and sometimes even station buyers outside, so they can quickly modify offers if need be.

Some buyers write personal notes to sellers, saying something about themselves, why they love the home and how they plan to live in it. That said, not all sellers and agents are receptive to such letters, which can introduce the possibility of Fair Housing Act violations.

Finally: be patient

The typical homebuyer in 2015 searched for 10 weeks and looked at 10 homes, according to the National Association of Realtors. In a hot market, a buyer might make 10 offers before winning one. After losing out on several homes, you might feel tempted to make a desperation bid or give up. Don’t do either.

Bidding too much or making an offer on a home you don’t really like will leave you resentful. You might be better off not getting a house.

If your search extends into the fall and winter, you may find the competition lets up, although there also tend to be fewer homes for sale these times of year.

Meanwhile, giving up will leave you, well, renting. That might make sense if you decide the market is overheated. It can be OK to overpay a little as a homebuyer, provided you don’t plan to sell anytime soon. Over time, the market should make up the difference.

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