Christina and Kevin Dirks have been searching for a house in the Denver area for four months at prices up to $275,000. They made offers on six homes—and were outbid on each one.
“When we first started looking, you had to pay $10,000 over” list price to win the bidding, Ms. Dirks said. “Then, as the weeks went by, it went up to $20,000. And now it’s up to $30,000 and $40,000.”
Ms. Dirks, a 28-year-old office coordinator, said she and her husband, a 30-year-old merchandiser, hope that as the market slows down this winter, “people will put a halt on being so crazy.”
Bidding wars, a hallmark of last decade’s housing boom, are making a comeback in a number of metro areas across the U.S. But while the earlier wars reflected enthusiasm fueled by easy-money mortgages, the current froth stems from a market short of homes for sale.
The reasons for the scant supply are myriad, including a much-slower-than-expected recovery in home construction. Yet an equally significant problem is that millions of people aren’t listing their homes for sale because they suspect they can’t qualify for a new mortgage, can’t afford the costs associated with a sale or fear that they won’t prevail in the scrum for the few houses available.
At the end of May, there were 2.3 million existing U.S. homes for sale, enough supply to last 5.1 months at the current sales pace. That is below the six to seven months of supply that the National Association of Realtors says is needed for a balanced market.
But in more than one-third of the 300 largest metropolitan areas tracked by Realtor.com, homes listed for sale in June had been on the market for a median of less than two months. A low median figure indicates rapid turnover in inventory as demand for homes exceeds supply.
Those include big markets like San Francisco, with a median time on market of 27 days, and Dallas at 38 days, as well as smaller markets like Vallejo, Calif., at 26 days and Kennewick, Wash., at 36 days.
The tightest market in June was Santa Rosa, Calif., a relatively affordable Bay Area suburb, where the median time a home was on the market was 24 days.
In those markets with limited supply, bidding wars tend to push prices higher, creating price bubbles. According to Realtor.com, the $580,000 median listing price in Santa Rosa is up nearly 10% from a year ago. That handily outpaces the national average increase in resale prices, which the National Association of Realtors calculates at 7.9%. Realtor.com is operated by Move Inc., which like The Wall Street Journal is owned by News Corp.
The low supply of homes reflects a reluctance or inability of owners to sell their current house or apartment and trade up to their next, often larger, one. Some remain skittish about the economy, their own finances or their ability to qualify for a mortgage. Others can’t sell because they are underwater, meaning they owe more on their mortgages than the homes are worth.
Even though U.S. home prices are up 31% in the past five years, 15.4% of homes—an estimated 7.9 million—remained underwater in the first quarter, according to real estate website Zillow. The long term average is 3% to 5%, Zillow says. These owners can’t sell unless they have thousands, sometimes tens of thousands, of dollars on hand to pay the shortfall on their old mortgage and finance costs of selling and moving.
Another pressure on housing inventories is growth in U.S. household formation. The U.S. added roughly 1.5 million households in the first quarter from a year earlier, though almost all were formed by renters.
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