Why Especially Hot Seller’s Markets Are Bad for Buyers

Why Especially Hot Seller’s Markets Are Bad for Buyers

At the time this post was written, the real estate market in many parts of the country was exceptionally hot. Places like Salt Lake City, Utah and Tampa, Florida are seeing hordes of new residents coming in and buying up everything on the market. Such conditions are very good for both real estate brokers and sellers. They are not so good for buyers.

You are probably familiar with the idea of seller’s and buyer’s markets. In a seller’s market, sellers have the upper hand thanks to limited inventory and competitive pricing. Buyers have the upper hand when conditions are the opposite. Plenty of available stock and not enough buyers combine to keep prices down.

All of that said, there are exceptionally hot markets that create extra problems. We are seeing that very thing in a number of markets as the country emerges from coronavirus.

Drastically Inflated Prices

CityHome Collective, a Salt Lake City real estate brokerage and interior design firm, explains that the first buyer casualty in exceptionally hot seller’s market is pricing. In the simplest possible terms, exceptionally hot markets generally present drastically inflated pricing.

You might have a house with an estimated assessment that only increased 5-10% for each of the last three years. But since the start of 2021, the value of that property has climbed 60%. It sounds drastic, but it is happening in some of the hottest markets in the country.

Salt Lake City is one such market. People are flocking there because the region is attracting tons of well-paying tech jobs. Workers have no problem picking up and moving. The end result is an ongoing demand that easily outstrips supply. Neither new home construction nor existing homes can keep up.

Plenty of Cash Offers

Another big problem during exceptionally hot sellers’ markets is the inability to compete against cash offers. This is a big problem in Florida right now. Scores of people are leaving the Northeast to get away from high taxes, cold weather, and government regulation. Florida is a favorite destination.

As a result, people are selling their northern homes and traveling to Florida with cash in their pockets. They can beat out local buyers looking to sell one home in order to upgrade to another. It is all in the cash. Sellers are more willing to take cash offers because sales are guaranteed. When offers are made contingent on mortgage approval and selling an existing home, there is always the risk that a deal will fall through.

The cash scenario presents two distinct problems for buyers. First, cash tends to drive up prices faster than they would otherwise increase. Buyers flush with cash are willing to offer more just to get a deal done. That makes it difficult for mortgage buyers to compete.

The other problem it creates its fast-moving inventory. A house can be listed in the morning and have several cash offers by late afternoon. How does a local buyer having to go through a bank or mortgage lender keep up with that pace?

Rent Increases as Well

Adding insult to injury is the fact that especially hot markets tend to affect rental rates as well. When people need housing but cannot find something to buy, what do they do? They look to rent homes or apartments. That increases rental demand and sends prices trending upward.

Especially hot markets are good for sellers. They are not good for buyers. But all hot markets crash and burn at some point. The current market will do the same. It is only a matter of time. Then buyers will be back in the driver’s seat.