ACROSS THE COUNTRY and particularly in the Northern Virginia Association of Realtors® region, it is a sellers’ market: there are many more buyers than there are available homes.

Inventory is in its 27th consecutive month of annual decline – reaching near-record lows in the area that includes Fairfax and Arlington Counties and the cities of Alexandria, Fairfax and Falls Church. Homebuyers in sellers’ markets face a tough road. Increased competition forces buyers to act fast, bid high, and pull out all the stops to put together a competitive offer.

According to a March 2018 National Association of Realtors® survey, the first three months of this year saw almost three-quarters of potential homebuyers searching for more than four months; almost 40 percent had been searching more than seven months. Out of necessity – and sometimes frustration – buyers often take extreme measures to secure a home purchase. To make their bids more competitive, many buyers place above- asking-price bids and waive significant contract contingencies, such as inspections and mortgage certifications. A number of statistics illustrate the scope of these competitive practices within the real estate market.

INVENTORY

The combination of near-record- low housing supply and sustained demand can often lead to bidding wars for properties. Low inventory often suppresses sales and drives up home prices, thereby making it increasingly difficult for buyers to find homes that match their needs and desires. However, a relatively strong economy has emboldened many prospective homebuyers – including millennials looking to buy starter homes – to capitalize on low mortgage interest rates while they last.

The number of closed home sales has reached a near- all-time high, as there were 2,581 closed sales in the NVAR region in June 2018. This represents the second highest monthly number on record. Young adult renters are increasingly feeling confident enough to buy, but they are entering a market that has experienced declining inventory for almost three years. In July 2018, the NVAR region had approximately 3,837 homes on the market, a decline of just over 12 percent from last year (Figure 1). This amounts to about 2.1 months of supply if homes continue to sell at the current pace. Typically, markets that favor sellers have less than six months of supply.  

Figure 1. Year-Over-Year Percent Change in Active Listings, NVAR Region

Source: Bright MLS. Statistics Calculated 8/5/2018

PERCENT OF ASKING PRICE

We can measure the extent of the housing competition and demand by comparing the price of homes sold with the original price listed by the sellers of those homes. This statistic is known as the sale price to original listing price (SP to OLP) ratio. The ratio for each regional home sale is often averaged together to gain a picture of that
area’s demand and buyer difficulty. The average SP to OLP ratio for the NVAR region for the first seven months of 2018 was 98.3 percent, meaning home sellers received, on average, 98.3 percent of original list price.

Figure 2. Average Sale Price to Original Listing Price Ratio by Housing Type, January-July of Each Year 2009-2018, NVAR Region

Source: Bright MLS. Statistics Calculated 8/5/2018.

So far in 2018, in all housing sectors, the average SP to OLP ratio has surpassed the previous highs of 2013 (Figure 2). Single-family attached homes (townhouses) are most competitive, with home sellers receiving, on average, 99.2 percent of original list price. Single-family detached homes and condos stand at around 98 percent average SP to OLP ratio.

Figure 3 shows that average SP to OLP varies geographically. Western Fairfax County, south central Fairfax County, and south Arlington have the highest average percentages of original list price received by sellers. The highest average SP to OLP ratio during the first half of 2018 occurred in Chantilly’s 20151 ZIP code at 102.5 percent, and the lowest occurred in Great Falls’ 22066 ZIP code at 94.9 percent. Only one ZIP code – Chantilly’s 20151 – saw average SP to OLP ratios above 100 percent, but many individual sales across the region had sales prices that were higher than  the original listing price.

Figure 3. Average SP to OLP Ratio by NVAR Region ZIP Code, January to July 2018

Source: Bright MLS. Statistics Calculated 7/15/2018

In order to secure a home, potential homebuyers may have to offer more money than the seller is asking or than the home may be worth. The competition between buyers, and thus neighborhood demand and supply, can be approximated by the number of homes being sold above the original list price. In these cases, the SP to OLP ratio rises above 100 percent.

Between January and July 2018, 3,536 (or nearly 30 percent of homes in the NVAR region) sold for greater than the original listing price. This figure was 26.1 percent in 2017 in the region and 18.7 percent in 2012. In 2012, the region was on par with the nation, which saw 18.8 percent of home sales above listing price.

One in four (24.5 percent) of U.S. home sales in 2017 sold above asking price, which is a slightly lower frequency than the NVAR region. This means that prices in the region are increasing slightly faster than the nation as a whole.

Figure 4. Percentage of Home Sales That Sold Above the Original Listing Price by ZIP Code, January to July 2018

Source: Bright MLS. Statistics Calculated 7/15/2018

Figure 4 shows the percentage of home sales in each ZIP code of the NVAR Region that sold for higher than the original listing price during the first six months of 2018. The highest percentages of above listing home sales are south of Fairfax City in central Fairfax County, as well as spots in far western Fairfax County, Annandale, western Arlington and northern Alexandria. The lowest percentage of homes sold above the original listing price were seen in northern Fairfax County in the Great Falls area along the Potomac River – an area consisting of predominantly large and expensive single-family homes.

Buyer age also factors in to competitive home buying practices in the current housing market. National data provided by NAR shows that during the first half of 2018, only 24 percent of buyers over 55 years old paid more than the asking price – compared to 59 percent of those 18-to 34-years old and 56 percent of those 35- to 54-years old. One-third of 18- to 54-year-olds made five or more offers on homes before closing. Older buyers again came out on top with 64 percent of buyers over 55 making only one or two offers, compared to 38 percent of those 35- to 54-years old
and 30 percent of 18- to 34-year-olds.

DAYS ON MARKET

The average days on market (DOM) for homes indicates the age of an area’s real estate listings and provides another indication of home buying competitiveness. In the
first half of 2018, the NVAR region’s average DOM was 37 days, which was down from 43 days in the  first half of 2017. Figure 5 shows that areas with lower average DOM correspond with the areas of higher average SP to OLP ratios. This is rational, as higher competitiveness with offers leads to a shorter number of days that homes stay on the market.

Figure 5. Average Number of Days on Market by ZIP Code, July 2018

Source: Bright MLS. Statistics Calculated 7/15/2018

 

EXCEPTIONAL CONTRACT MEASURES

According to a March 2018 NAR survey of more than 1,000 active buyers, only 6 percent of all home shoppers indicated that they are not planning
to use any special tactics to cope with competition this year. Many of the remaining 94 percent of potential homebuyers said that they will offer bids above the listing price and use other strategies to outmaneuver the competition.

HIGHER DOWN PAYMENTS

A larger down payment usually makes sellers feel more confident in a buyer’s financial standing. However, the overall offer price is typically more powerful as sellers are looking for the highest and best offer. According to a realtor.com analysis of Optimal Blue mortgage origination data from the first half of 2018, more than 30 percent of buyers put more than 20 percent down. This data also shows that larger down payments are more common among older buyers – with 22 percent of those aged 18 to 34, 32 percent of those aged 35 to 54, and 51 percent of those aged 55 and older putting more than 20 percent down.

"In the face of historically tight inventory, buyers will likely continue to be more aggressive in the terms and conditions of their offers."

INCREASES IN EARNEST MONEY FOR ESCROW DEPOSIT

The earnest money deposit tells sellers that buyers are committed and it helps fund the down payment. Without earnest money, buyers could make offers on many homes, essentially taking those homes off the market until the buyers decide which home they prefer. Sellers rarely accept offers without deposits and committing more earnest money translates to less risk for the seller. According to NAR research, 31 percent of all home searchers report employing this strategy during the first half of 2018.

ESCALATION CLAUSES

An escalation clause is optional offer language stating that the buyer will increase the offer by a certain amount or percentage over the higher bid up to a stated amount. The clause is only triggered by a competing offer. Escalation clauses can get buyers to the highest bid, and such clauses also reveal the maximum amount that the buyers are willing to pay for the house. In response, the seller may attempt to counter that offer with a price equal or close to the escalation ceiling.

PERSONAL LETTER

Homebuyers trying to stand out often write an “offer to purchase” letter to accompany their offer. Appealingto sellers on a personal level can sometimes give buyers an emotional edge over other buyers. According to NAR research, 24 percent of buyers wrote personal letters to supplement their bids during the first half of 2018.

SHORTER CLOSING

If a seller’s motivation is due to something that requires a quick move, such as a job change, a faster closing period could sway them in a particular buyer’s favor. Shortening inspection and mortgage approval timeframes, or even forgoing certain contingencies altogether, can move up the closing date.

WAIVE INSPECTION CONTINGENCY

The inspection contingency enables buyers to have the home professionally inspected. If problems are found, buyers can request that sellers address those issues or buyers can back out of the sale. For buyers, it is rarely advisable to waive an inspection contingency, but doing so is attractive to sellers because it could avoid the potential for costly repairs. In some instances, buyers may offer a modified inspection contingency whereby an inspection is done for information purposes or to void the sale only if serious defects are discovered. According to NAR’s March 2018 buyer sentiment survey, one in five buyers reported a willingness to waive home inspection contingencies.

WAIVE MORTGAGE CONTINGENCY

A mortgage contingency protects the buyer and seller from entering into a contract without proper buyer financing. Under this contingency, the buyer has a specified time period to obtain a loan that will cover the mortgage. If the buyer cannot get a lender to commit to a loan, the buyer has the right to walk away from the sale with the down payment, a scenario that would create difficulties for the seller. A financially secure buyer who knows that securing a mortgage will not be a problem might consider waiving the mortgage contingency.

WAIVE APPRAISAL CONTINGENCY

The appraisal is an independent assessment of the property’s value and is required by any lender. If the appraised value is less than the sale price, the appraisal contingency allows buyers to back out of the deal. If the appraisal shows that the home is valued at less than the contract offer, the bank may still loan the buyer a certain percentage of the appraised value, but the buyer would have to pay the difference.

WORTH THE RISK?

Many of the measures being taken to win bidding wars in a hot housing market may be worth the risk for buyers if the result is securing their desired home. However, in some cases the risk may be miscalculated to the detriment of the buyer. Mortgage data shows that desperate buyers are willing to stretch to purchase property, often well above their means. According to CoreLogic, more than 20 percent of borrowers in 2017 spent more than 45 percent of their monthly income on mortgage payments – a percentage not seen since the run-up to the Great Recession. Analysis from Arch Mortgage Insurance Company found that the size of the monthly mortgage payment needed to afford a home rose 5 percent in the first quarter of 2018 and may rise an additional 10 to 15 percent by year’s end.

Waiving contingencies also poses potential financial risk for homebuyers. Costly repairs resulting from waived inspections, independent appraisals well below sale price, and being declined financing and losing the down payment can all lead to significant financial distress.

CONTINUED MARKET COMPETITION LOOKING FORWARD

The challenge of low inventory will likely persist for some time in the NVAR region. Tired of looking at homes and losing bidding wars, buyers are increasingly frustrated as prices continue to rise and inventories shrink. In the face of historically tight inventory, buyers will likely continue to be more aggressive in the terms and conditions of their offers. The inventory crunch is not expected to ease meaningfully during the remainder of 2018. House hunters will likely continue to waive inspections, make offers without even seeing homes, and bid above asking price – all in pursuit of their ideal home.