By AnnaMaria Andriotis
In many parts of the country, this is a good time to sell a
home. That could make it a risky time to buy one.
Houses are selling fast and prices are going up. Sales of
existing homes nationwide are expected to reach the highest volume
since 2006, according to the National Association of Realtors.
In the first quarter, median sales prices of single-family homes
were at least 10% higher than a year prior in 51 metropolitan
areas, according to the trade group. That included Charlotte, N.C.,
up 18%, and Denver, up 17%. Nationwide, median prices rose 7.4%, to
$205,200.
A shortage of homes for sale is helping to drive the market
higher, experts say, along with a gradually improving economy and a
growing concern that a period of historically low interest rates
may not last much longer.
Competition among buyers can be fierce, and some are
aggressively wooing sellers in an attempt to stand out.
Amanda Corona bid more than the asking price on a
2,100-square-foot townhouse in Atlanta, and she agreed to see the
deal through even if the home was appraised for less than the
purchase price.
"I guess I'm a risk taker," says Ms. Corona, an insurance
executive who is 38 years old. The appraisal came in above the
purchase price of $365,000 and she closed on the house this
month.
Buyers should consider what could go wrong in this kind of
market. A bidding war could entice you to spend more than you can
afford. An inflated price could leave you owing more than you can
sell the house for down the road, if prices fall.
Some strategies could limit the danger. Study whether prices in
your city are being driven by low inventory, which could be a
warning sign, or a solid economy, which could sustain prices.
Set a budget and stick to it. And see if new homes may hit your
local market soon, which could cool things down. On Tuesday, the
Commerce Department said that in April construction on new homes
rose to the highest level since before the recession.
Keep in mind that it could still be a good time to buy. Mortgage
rates remain near historic lows and home prices could keep rising.
Buyers should also factor in how long they plan to keep a home,
because short-term volatility may not matter for a long-term
owner.
Here is a buyer's guide to navigating a seller's market.
Supply and Demand
House-hunting can be difficult when homes for sale are hard to
find.
In a market balanced between buyers and sellers, there are
enough existing homes available to satisfy demand for six to seven
months, according to the Realtors association. But in the first
quarter, the association says, there was only 4.6 months' worth of
inventory available nationwide on average, down from 4.9 months in
the same period of 2014.
Listings have grown scarcer in many big cities. In Seattle,
there were 8,465 homes listed for sale in April, down 23% from a
year earlier, according to Redfin, a national brokerage based in
Seattle. In Portland, Ore., there were 8,941 listings, down 27%. In
Omaha, Neb., there were 4,158 listings, down 20%.
Some homeowners who bought at the top of the market are
reluctant to sell because the value of their home plummeted in the
financial crisis and still hasn't fully recovered. Others are
holding out for higher prices, experts say.
Whatever the cause, a shortage of listings can have a
significant impact on prices even in an otherwise listless
market.
In a March report, Fitch Ratings, a credit-rating firm, said
that prices in many metropolitan areas are being driven up more by
limited inventory than by a strong economy.
"With supply limited, small increases in demand can have
outsized impacts on prices," the report said.
Under Construction
That puts a premium on taking the pulse of your local
market.
Try to determine if the local economy is strong. If jobs are
growing, incomes are rising and people are moving into town, that
could be a sign that price increases are sustainable or that more
houses will soon come onto the market.
Look for signs of new construction in the neighborhood. The
number of lots that have been prepared for home building increased
more than 21% over the 12 months through March, says Brad Hunter,
chief economist at Metrostudy, a research and consulting firm that
tracks the home-building industry.
The Commerce Department says the seasonally adjusted annual rate
of housing starts increased 9.2% nationwide in April from a year
earlier, and the rate of housing units authorized by building
permits rose 6.4%.
Growth varies by region. In the Northeast, for example, housing
starts increased 52% from a year ago and building permits increased
57%. In the South, the increases were 3.5% and 1.3%, respectively.
In the Midwest, starts declined 10.5% and building permits declined
7.5%. In the West, starts rose 15% and permits rose 3.4%.
The Commerce Department provides data on building permits for
many metropolitan areas. Other sources track local data on housing
starts. According to Metrostudy. housing starts of single-family
detached homes were up about 15% in Denver and Atlanta in the first
quarter, compared with the same period last year, for example. In
Las Vegas, they are up more than 36%, says Metrostudy.
Ask experts in your market what they are seeing. If construction
activity is strong, you should be able to find evidence without too
much trouble.
If new homes are going up, patience could pay off. Chris Langan
and his partner put their five-month house search in Atlanta on
hold in April after the couple grew tired of looking at houses that
cost more than they wanted to spend and more than they thought the
homes were worth, he says.
"When I see a lot of people going toward one thing--this mass
frenzy--I like to step back and evaluate it," says Mr. Langan, 31,
a sales consultant for a food distributor. He says they plan to
rent for two years, by which point he expects the market to be
calmer.
Winning and Losing
Buyers who push ahead could get lured into bidding wars, where
winning in the short term can later feel like losing if you pay too
much.
Bidding wars were more common in the first quarter than they
were a year earlier in several markets, including Denver, Fort
Lauderdale, Fla.; Oakland, Calif.; Philadelphia, Pa.; Portland,
Ore.; and Seattle, Wash., according to Redfin, which bases its
figures on the number of bids submitted by its agents that face at
least one competing offer.
Other markets saw fewer bidding wars over the same period,
including Atlanta; Baltimore; Chicago; Orange County, Calif.; and
Washington, D.C., according to Redfin.
Buyers often need to move quickly, which can add to the frenzy.
In Denver, Houston, Oakland and Seattle, more than 40% of the homes
for sale in the first quarter were in contract within two weeks,
according to Redfin.
As a result, buyers should figure out how much they can afford
to spend ahead of time. Consider getting a preapproval from the
mortgage lender you select.
That doesn't mean you should borrow the full amount for which
you are preapproved. Be sure the monthly mortgage payments will
leave enough left over for living expenses and emergency funds.
Think about how you would cover the cost if you were temporarily
unemployed.
Once you set a budget, stick to it. Be prepared to walk away if
prices get too high.
Consider looking at houses that aren't selling as quickly. The
owners may be more willing to lower the asking price. But get a
thorough inspection to make sure you aren't buying a house with
serious flaws.
In Denver these days, a house that hasn't been snapped up within
two to four weeks is likely either to be overpriced or to need
fixing up, says Tim Davis, owner and managing broker at Weichert
Realtors Professionals in Denver.
Self Defense
Buyers who are eager to purchase a home are also waiving rights
that are standard in sales contracts, experts say.
In addition to promising to plow ahead even if an appraisal
values the house below the purchase price, buyers are agreeing to
forego the option of dropping out if an inspection shows the need
for costly repairs or if they are unable to get a mortgage.
"We're seeing strategies and situations that have never been
experienced here, and I've been in the real-estate business since
1987," says Mr. Davis, the Denver broker.
These kinds of contingency clauses, as they are known, are meant
to protect buyers. If you agree to drop them, you could end up
forfeiting your deposit if you back out anyway. The seller could
also sue the buyer, though that is uncommon in a seller's market,
says Bob Lattas, a real-estate attorney in Chicago.
There are other risks, too. If an appraisal comes in low, buyers
could have to put up fresh cash in a hurry in order to go through
with the deal. That's because lenders typically reduce the loan
amount if a house is appraised at less than the purchase price.
If, for example, a buyer agrees to pay $400,000 for a house, but
the appraised value is $380,000, the buyer could have to pay the
seller an additional $20,000 out of pocket.
In such situations, buyers essentially acknowledge that they're
overpaying. They believe "the house will increase in value so much
that even if something is wrong with it [they] will still be fine,"
says Doug Miller, a real-estate attorney and executive director of
Consumer Advocates in American Real Estate, a nonprofit based in
Navarre, Minn.
The risk is that prices don't continue to go up--or, even worse,
drop.
Unless buyers are certain they can assume the risks, they may be
better off avoiding situations where they have to drop contingency
clauses in order to strike a deal, says Richard Vetstein, a
real-estate attorney in Framingham, Mass.
If you do decide to waive contingency clauses, try to determine
how nasty the financial surprise might be.
Keep in mind that price and value aren't the same thing. Carole
Short, a real-estate agent with Coldwell Banker Residential
Brokerage in Atlanta, says some agents are agreeing to list homes
at high prices in order to win the business.
She says, "We are starting to see some greedy-seller overpriced
listings at numbers where you go, 'Oh my God, are you kidding? That
house isn't worth that.'"
For the latest personal-finance news and analysis from the
Journal, bookmark WSJ.com's Your Money page.