How to avoid ‘panic buying’ in an ultra-competitive housing market

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With housing inventory and mortgage rates low, competition among homebuyers in some areas has gone from brisk to combative. That’s leading some to move especially quickly and stretch their budgets in order to make sure a property they love doesn’t slip through the cracks.

Kevin Kieffer, a broker associate with Compass’ EastBayPro Team in the East Bay area near San Francisco calls this behavior “panic buying” and said it can be easy in the current market 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?

“These buyers are so afraid they’re going to miss these low rates and then they’re just not going to be able to buy a home,” Kieffer said “They’re just panicking, which I think 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 now Kieffer said 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.

“Here we’re seeing 10 offers come in on a property, and like two just blow up the comps by 15 or 20 percent,” he said. “Twenty percent is something that we’ve never seen before.”

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.

According to data from Hippo Insurance, 63 percent of recent homeowners between the ages of 23 and 38 have regrets about their purchase, and 66 percent of all homeowners have spent at least $1,000 on repairs in the last year.

Andrea Collins, Hippo’s vice president of marketing, noted that COVID added another layer of complication to the real estate landscape by leading more people than ever to buy homes without first visiting them in person.

“For the first time in our lifetimes, people are making these major purchases, normally your home is your largest financial asset and they don’t know what to look for in these virtual tours,” she said.

What regrets do new homeowners have?

“There are a lot of people who are buying homes for the first time and you just don’t realize the volume of things you need to do to maintain a house,” said Steve Wilson, senior underwriting manager at Hippo. “People 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.

“Those are all things that are easy to see on a basic walkthrough and can help inform your decision of whether you want to buy this house,” Wilson said.

Even if you waive your inspection contingencies, that doesn’t mean you should skip the inspection altogether. It’s a good idea to know what you’re getting into so you can budget for any urgent repairs after you move in

Collins added that for people leaving the city for the suburbs or moving to another part of the country, it’s especially important to get a feel for your new neighborhood and understand any environmental risks in your new area.

“I have found that a lot of people especially in the California, Texas, Florida, New York areas have not looked at home insurance before they buy the house, and then they’re in shock that they’re in a wildfire zone, or a flood zone or a hurricane zone,” she said. Those external factors can also result in big extra expenses.

How to avoid panic buying

First and foremost, Collins said, you should work with a knowledgeable Realtor you can trust, 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 trust and know, outside of your Realtor, no offense to our wonderful Realtors but they’re going to look at properties very differently than you do,” she said. “How you visualize yourself in the house will go a big way to getting the right advice and tips moving forward.”

Beyond that, it’s important to 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.

Kieffer added that many buyers are also adjusting their price expectations as homes keep selling for well over their list value.

“A lot of folks are regressing their target price,” he said. “I need to step it back so I’m looking at the properties I’m capable of purchasing.”

Overbidding: Causes and consequences

Bidding on a home is more art than science, but the basic principle is: 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 then 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, which means you’ll probably have to  add more cash to the deal.

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. The hot housing market will almost certainly cool off eventually, and inventory will slowly rise over time, so you may find more favorable market conditions–and fewer bidders– just by waiting for a while.

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 finish line.

If you’re overwhelmed by the housing market, find some professionals to help guide you through the process, and don’t be afraid of walking 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 always 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 said. “You may not have had that two years ago.”

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Written by
Zach Wichter
Mortgage reporter
Zach Wichter is a mortgage reporter at Bankrate. He previously worked on the Business desk at The New York Times where he won a Loeb Award for breaking news, and covered aviation for The Points Guy.