Homebuying has gotten harder; local real estate brokers explain why
High demand and short supply, together with high lumber prices and low interest rates, are making for a housing market that led one Park Rapids real estate broker to say, "Fundamentals have gone by the wayside."
Local real estate brokers responded recently to a report about a local homebuyer being outbid in multiple offers by people moving into the Park Rapids area.
The Enterprise asked real estate brokers Diane Dennis with Coldwell Banker Clack & Dennis Real Estate, T.J. Simon with Wolff & Simon Real Estate and Jack Brann with Affinity Real Estate if they have seen anything unusual in the local housing market.
“Yes, we are seeing high demand,” said Dennis. “Inventory is moving very quickly. Many of the homes end up with multiple offers.”
Simon said this reflects a lack of available inventory – that is, houses for sale. At this time last year, he said, “we were at about a 4.2-month supply. This year, right now … we’re at a one-month supply.”
“That’s lower than the national average, which is already at a historic low,” he added.
“There’s a lot of things to the seller’s advantage right now,” said Brann. “The ‘supply and demand’ analogies that you hear used in so many situations, couldn’t be more true right now. There is a major demand, a major shortage of inventory, and when that happens, it only benefits one person in the transaction, and that is the seller, every day of the week.”
“Year-to-date, the percentage of original list price received is 95 percent,” said Simon. “It’s up half a percent over last year. Our pending sales, closed sales so far this year, are up almost 50 percent, just in the Headwaters Region.”
Housing in short supply
Dennis said a factor in the inventory shortage is that “people don’t really want to put their houses on the market until they know that there’s another house that they can find that works for them. So they’re waiting, and it just turns into a vicious circle.”
“A lot of our older folks have decided to stay put,” Brann said, adding that the COVID-19 pandemic has made them leery of leaving their lake home to go back to more heavily populated areas.
Also, he said, in normal times he can talk people into selling their house and using the proceeds to buy a local replacement.
“Right now, you can’t even make those calls,” said Brann, “There’s no replacement. There’s no carrot that you can dangle to get them to veer from their position. (But) if you’re a seller, if you’re leaving the area, the world is absolutely yours right now.”
Dennis said she expects this unbalanced demand to level off sometime this summer.
“It has made for a very difficult time for buyers,” said Brann. “We are dealing with multiple offers.”
More than the asking price
“In multiple-offer situations, the offers are, many times, coming in over the asking price,” said Dennis. “We’re also seeing the use of escalation clauses, where a buyer will say, ‘I’ll pay X number of dollars over a competing offer, up to a certain price.’”
She said it wasn’t common to see these acceleration clauses in the local market until last year.
“They’re just trying to put their best foot forward and be the successful bidder,” she explained. “Price is usually the main factor in which offer a seller is going to accept.”
Dennis acknowledged that other factors may be in play as well, such as whether an offer is contingent on selling another home, on financing, an inspection, or the timeframe for closing. “But yes, the competition right now is very tough in the housing market around here,” she said.
“A low offer, right now, is asking price,” said Brann. “We are seeing many offers that are going tens of thousands of dollars over asking price. And we are seeing many circumstances where there’s anywhere from three to 20 offers on a property.”
Saving on the interest
Each of the brokers suggested possible reasons for the run on local real estate. One common theme was the current interest rates.
“A lot of people who are currently renting, with the low interest rates, could get a first-time homebuyer loan and buy a house, and their mortgage payment could potentially be less than what they’re paying in rent,” said Dennis.
“There’s this overwhelming fear of missing out on interest rates that start with the number 2,” Brann agreed. “We have never seen sub-3 percent rates, and most people believe that once they are gone, they are probably going to be gone forever. And so, there is this mass hysteria that they don’t care if it’s 2.99 or 2 percent or somewhere in between. If it’s the number 2, they want in.”
He said this has also been a factor in many buyers’ decision to offer more than the asking price. “Right now, people are saying, ‘If it’s 100 grand, will 120 take take it? We’re just tired of looking. We don’t want to lose that interest rate.’”
Simple math, he said, shows that even if they pay more for the purchase at a 2-1/2 percent interest rate, in the long run they’ll pay less than if they bought it for a lesser price at a higher interest rate.
As a result of these issues, Brann said, in “this crazy situation right now … we have buyers that are buying on pure emotion.”
Like the caller who complained that he keeps being outbid, Brann said, “Every buyer out there right now, making offers, almost every single one of them has been the loser in another negotiation. People are just tired of the search. They’re tired of losing. And they’re just buying on sheer emotion and fear of missing out. Really, fundamentals have gone by the wayside.”
Other reasons for the run
With the pandemic, Dennis said, many people are realizing that they can work from home.
“We’re seeing a lot of people who want to leave the metropolitan areas,” she said, “but now can work from home, so they want to be in lake country.”
She said local people who are working from home are finding they need more room. So, they are looking to upgrade to a bigger place, with room for a home office.
Brann cited urban flight as a reason. “Downtown Minneapolis is still boarded up, and there’s still a lot of things going on down there,” he said. “And money is mobile.
“We also have a paradigm shift,” he said, “this exodus from the west coast.”
Brann said he has seen an influx of home buyers from California like nothing he has witnessed in his two-decade career.
“Every year I’ve had maybe a sale from somebody that was associated to, or from, California,” he said. “Since April of last year, I myself personally have probably had 15 closings with people from California.”
Traditionally, he said, when someone from California made a windfall on a real estate sale, they replaced it with property in Colorado, Montana, Utah, Nevada or New Mexico.
“But what’s happened now is, the pricing in those states is almost in line with the pricing in California, so they can’t take their profits and their equity and reacquire at a lower price and still have a frothy bank account.”
As a result, buyers are venturing farther east and discovering Minnesota as an area where they can buy property and still hold cash.
“We are a very broad-based community in terms of price ranges and offerings, in terms of country homes, city homes, lake cabins, what have you,” he said. “Your dollars still go further here than they do in Brainerd or in Alexandria, or even in Detroit Lakes.”
Another reason for the pressure on the housing supply, Brann said, “is the building materials and building costs are so high right now. Folks that were previously in the market to build have simply been priced out of that market, because material costs are through the roof, unlike anything we’ve ever seen before.”
Tips for being noticed
Asked for tips on how buyers can be the successful bidder in a multiple-offer situation, all three brokers recommended getting a pre-approval letter from their bank, showing that you’re financially capable of buying a house.
Brann went further, suggesting a pre-approval letter for a specific property when making an offer.
Simon and Dennis both stressed staying on top of new listings and being available to look at a property on a moment’s notice.
“Things are selling so rapidly that if a house hits the market and they can’t look at it for four or five days, chances are it’s going to be gone,” said Dennis.
She also assumed most buyers will work with a realtor, who will give them good advice.
“Align yourself with somebody who knows how to negotiate, knows how to navigate these market cycles,” Brann agreed.
He also suggested being prepared to put down significant earnest money and, if you are offering more than the appraised value of the home, documenting that you have funds on hand to cover the difference.
“Too many people are making offers without those simple clarifications, or forward-thinking measures,” said Brann. “But the people that are prepared, that show they’re serious … those are the ones that separate themselves from the balance.”