In this aggressive seller’s market, many successful bidders are waiving appraisal contingencies. Agents must be equipped to address their buyer-clients’ concerns about paying more than the appraised value for a property.
An appraised value less than the contract price will increase the loan to value. This can require additional cash down payment and/or mortgage insurance.
Should a buyer pay more than appraised value? Tough question. But, in this market, the answer is often “yes”. There are many competing buyers willing to waive appraisal contingencies. However, home prices are moving up at a brisk pace. The appreciation in value will likely help home values catch up to price in a year or so.
The strongest buyers prevail – Successful bidders for homes are making cash offers with no contingencies for the appraised value. Move up buyers are confronted with the challenge to buy a new home before selling their departure residence. One concern is to sell first and not get a new home in time for the move. Such buyers may need to qualify for their purchase while carrying their departure residence because sellers may not consider a contingency for the sale of the departure residence.
Do bidding wars create a bubble in prices? I do not believe that the current trend to higher prices will create a bubble that will burst because the buyers are purchasing for their use, not speculation. Price bubbles in stocks, tulips, and real estate are the result of investors simply speculating that some fool will be willing to pay more for an asset in the near term. I have not observed investors buying homes on speculation to flip at a higher price.
Many sectors of the market have prospered during Covid. As we return to normalcy, the economy will improve even more. So, the upward pressure on home pricing will continue. Higher interest rates in the next 6-12 months may moderate the rate of appreciation unless inflation becomes an additional influence to even greater price increases.
Millennials are entering the home market. We will see more millennials become home buyers in the next few years created even stronger demand for the limited housing supply in San Diego.
Conclusion – This is a tough market for home buyers with prices rising rapidly and fierce completion for limited inventory. I expect pricing to continue upward in the next year. However, I believe the rate of appreciation will slow later this year as the fear of Covid subsides and more home sellers are willing to list their property.