How to avoid panic buying in a hot housing market
With housing inventory still in short supply and historically low mortgage rates starting to inch back upward, the real estate market has gone from brisk to combative. In such a competitive environment, many buyers feel pressure to move quickly and stretch their budgets to make sure a property they love doesn’t slip through the cracks. In fact, according to a homeownership report from Hippo Insurance, 68 percent of buyers in 2021 paid above asking price.
Kevin Kieffer, a Realtor with Compass’ EastBayPro Team in the San Francisco Bay area, calls this behavior “panic buying.” In the current market, he says, it can be easy for prospective homeowners to get in over their heads. Don’t let that happen to you. Instead, get familiar with panic buying and its pitfalls, and learn how to avoid them.
What is panic buying?
“Buyers are so afraid they’re going to miss these low rates, and then they won’t be able to buy a home,” Kieffer says. “They’re just panicking, which creates irrational decisions.”
It’s already common for buyers in especially competitive areas to waive contingencies in their offers or include appraisal gap coverage. But Kieffer says he’s also seeing many people offer significantly more than the asking price. In many areas, homes selling over the asking price have become the norm.
Buyers aren’t just overextending themselves with high offers, either. That practice of waiving contingencies means new homeowners could be on the hook for expensive repairs as soon as they move in. In fact, according to Hippo, 81 percent of recent firsttime homebuyers had unexpected repairs in the first year. And 66 percent of all new homeowners spent $1,000 or more on repairs in the first year.
Buyer’s remorse
“There are a lot of people who are buying homes for the first time, and they just don’t realize the volume of things you need to do to maintain a house,” says
Steve Wilson, senior underwriting manager at Hippo. “People are having remorse around the upkeep of the home, and how failure to do that maintenance can lead to a costly issue.”
Things like the plumbing, electrical and climate control systems are important to check before you close, as well as structural parts of the house like the foundation, roof and attic.
Even if you waive your inspection contingency, that doesn’t mean you should skip the home inspection altogether. It’s a good idea to still conduct an inspection, so you know what you’re getting into and can budget for any repairs that will be necessary after moving in.
Klosterman adds that for people leaving a city for the suburbs or moving to another part of the country, it’s especially important to understand any environmental risks in your new area.
“I have found that a lot of people, especially in the California, Texas, Florida and New York areas, have not looked at home insurance before they buy the house,” she says. “And then they’re in shock that they’re in a wildfire zone or a flood zone or a hurricane zone.” Those external factors can result in big extra expenses.
Work with a Realtor
First and foremost, Klosterman says, you should work with a knowledgeable Realtor. But it’s also a good idea to speak to homeowners in your personal orbit. “It’s really smart to lean on a trusted homeowner during the process. Someone in the area, someone you know and trust, outside of your Realtor,” she says. “No offense to our wonderful Realtors, but they’re going to look at properties very differently than you do.”
Beyond that, it’s important not to rush, and to make sure you are prepared to ask crucial questions about a property’s condition and your mortgage loan as you go through the process.
Overbidding
In an overheated housing market like the one we’re currently experiencing, bidding wars, which involve multiple buyers competing for the same property, are more common than ever. Bidding on a home is more art than science, but the basic principle is that you don’t want to wind up with more house than you can afford, or pay much more than market value.
It’s smart for most buyers to establish a budget well before they start shopping, and to stick to it no matter how much they might fall in love with a property. Keep in mind that if you bid too much for a property, the appraisal is almost certain to come in low. And a low appraisal means you’ll probably have to add more cash to the deal to bridge the gap.
If you’re not sure where to start with your budget, check out Bankrate’s housing affordability and mortgage payment calculators, which can help you estimate your monthly costs and figure out what your budget should look like.
If you can’t find a forever home in your price range, consider a starter home. If all else fails, remember that patience can pay dividends.
Bottom line
For most people, a house is the biggest purchase they’ll ever make. It’s not a transaction to be entered into lightly, and it’s not a race to the closing table. If you’re overwhelmed by the housing market, find professionals who can help guide you through the process. And don’t be afraid to walk away from a deal that could ultimately leave you with a house you can’t afford to maintain or pay off.
Also, remember: There’s an emergency escape hatch in a competitive real estate climate like this one. “You may still have the option, since it’s a hot market, to sell the house if it’s truly not for you,” Wilson says. “You may not have had that two years ago.”