Hot Housing Market Calls for Cleaning Out Your Closets—or Your Bank Account

In this year of the home bidding war, whether you’re ready to shout “Charge!” or wave the white surrender flag depends on which side of white picket fence you’re standing.

Prospective U.S. buyers are facing fierce competition for limited inventory, as low mortgage rates and pent-up demand drive a seller’s market. Sellers, meanwhile, are seeing multiple (and even all-cash) offers, often significantly above both the asking price and appraised value. The result: Home prices in March increased a remarkable 13.2% over a year ago, according to a leading national index.
Elinda F. Kiss, associate clinical professor of finance at the University of Maryland’s Robert H. Smith School of Business, has been closely watching the market frenzy and shared her insights in a recent interview.

Why is the market so wild right now?
To stimulate an economy that was depressed due to decreased spending during the pandemic in 2020, the Federal Reserve slashed interest rates and injected hundreds of billions of dollars into the markets through purchases of securities. Then last spring, no one could visit a house for sale due to the pandemic quarantine, and by autumn, there was pent-up demand. Low interest rates also made it possible for buyers to pay more for a house.

Consequently, in the current landscape, there simply are more buyers than sellers, and homes are moving quickly—often for more than the asking price. For instance, our daughter had to offer $20,000 more than the asking price because they had been outbid on 20 previous houses.

Any special tips or tricks for success if you find “THE” house?
If you are willing to make an all-cash offer, you have an edge, because the sellers know that the sale can close quickly without contingencies. But to improve your chances of having an offer accepted in this market, you may need to act fast and think creatively.

What advice do you have for buyers not swimming in cash?
If you can, get a pre-approval letter from a reputable lender; that letter will show that you are credit-worthy and can afford the mortgage that you will need to borrow to buy the house. The sellers want a buyer who can close quickly and may be flexible as to the closing date.

Second, try to make a “clean offer” without contingencies. No seller wants to accept an offer that falls through in a few weeks if the appraisal is lower than the agreed-upon sales price.

Also, explore homes ahead of their official listing through virtual tours so that you are able to submit the bid to buy the house of your dreams as soon as you see it in person. In April 2021, 47% of U.S. homes were on the market for less than one week before an offer was accepted. (We sold our house last fall. Of the seven couples who looked at it the first day it was shown, five couples sent contracts within one day to buy.)

And you’ll want have a good local agent who understands the market who can present your offer professionally and promptly, and has a good idea at what price the house will sell.

Finally, be prepared for a bidding war with a plan that allows you to act quickly. To avoid paying more than you can afford for a house that you want, review what you must have in the house ahead of time; identify what is non-negotiable and where you’re willing to be flexible.

What advice do you have for sellers looking to make the most of this market?
Number one, declutter your house by giving away, tossing or store much of what is in your house. The buyer wants to imagine his or her furniture and keepsakes in the house, and not to see yours. Also, make sure the front of the house and the yard look great; first impressions are important.
Don’t go overboard on remodeling or fixing up your house. Buyers may want to do their own changes, and usually will not want the upgrades that you have made. Do schedule needed repairs. Perhaps get an optional home inspection to identify any issues.

Is the market so hot that we’re headed for another crash?
While the 2008 drop was frightening, with almost 9.3 million borrowers losing their homes to foreclosure and short sale, today’s market is different.
First, mortgage standards have improved. In the early 2000s, it seemed that as long as you were alive and breathing, you could qualify for a mortgage. Subprime borrowers, who did not make monthly payments on time, still qualified. Lenders did not verify the income of borrowers, leading to “liar's loans.” Appraisals were often “drive by”—is there a house there? Okay; it appraises. But today, due to improvements in underwriting technology and quality controls, qualifying for a mortgage is tough.

Second, there is still a shortage of homes for sale. In 2008 there was an oversupply of homes for sale; the resultant falling prices put many new homeowners “under water,” causing them to lose their homes.

Third, homeowners have equity in their homes. During the 2004-07 bubble, many homeowners took out home equity loans to buy a second or third home. As prices fell, these owners found themselves in a negative equity situation; consequently, they “walked away” from their homes, leading to a glut of foreclosures and short sales, driving prices even lower. Today, more than 50% of homeowners have more than 50% equity in their homes.

This interview has been condensed from an original version that can be found on the Smith Brain Trust website.