If you have lived in Houston for a decade or more, you are experiencing an unprecedented housing appreciation period. I'm not referring to merely the stereotypical Houston hotspots of The Heights, West U, Bellaire, Rice Military, etc. I'm talking about the buyer shock that comes from being outbid on homes that are located in previously unremarkable suburbs. Millions of residents who live outside of the beltway know that home values have historically been flat. Occasionally interest rates might hit a new low, spurring some additional buyer activity, and creating a small bump in $/sq ft. But that's been it. Until now.
This past weekend, a home went up for sale about a mile from my house. The list price was $60,000 higher than any sale in the neighborhood in the past 15 months. My clients, who have patiently shopped for a home with similar features, asked to see the property. We toured it in the late morning on a Saturday. We discussed its price point, and the unlikelihood that the seller would accept much less than list price in being so new to the market. I asked the listing agent a few questions about how she and her clients arrived at their list price. Her answer was somewhat vague. In other words, she couldn't point to specific comparable sales that justified the list price. She simply knew what the market was doing. My clients ended up offering $20,000 over the highest sale in the past 15 months, hoping to at least demonstrate a willingness to pay a premium without experiencing appraisal issues that I highlight below. And yet, two other buyer candidates offered list price that same weekend.
There are ramifications to paying well above historical sales, the biggest being when the appraisal performed by the buyer's lender potentially comes in well below list price, requiring i) sellers to reduce their price, or ii) buyers to use cash to make up the difference between contract price and appraised value, or iii) some compromise of the two concessions. In this market, few sellers will choose to be participants in that compromise. "If you won't pay it, the next buyer will," so says the seller in a hot housing market.
I've been educating my buyers about the realities of the current housing market, an unprecedented housing market, a market that requires that you not only have down payment money in place, but also "appraisal shortfall" money that allows you to compete with other buyers and weather the appraisal storm. I never suggest a buyer make a bad financial decision. But when a customer asks me about the risks in overpaying for a home, I challenge them to define "overpaying." That's a tough pill to swallow. High demand markets don't listen to reason. Houstonians are the latecomers to that reality. I'm here to help my customers evaluate the market, so that the pursuit of a home becomes less about whether or not you are overpaying, and more about buying homes in an informed, intelligent manner.