Today's buyers: what are they thinking?
Say you're a buyer looking for an affordable single-family home. (Say you're lots of people.) Your agent finds you a home that's well within your budget and might work. Sure, it's tired cosmetically, but the home gets you into a neighborhood you otherwise couldn't afford.
You go to one of the open houses, taking your posse with you. Then you talk to still more friends, and maybe a co-worker or two, all of whom seem to know a lot more about buying a home than you do. You look over the contractors' estimates the listing agent has helpfully given you. You even call a contractor that friends recommend and pick his brains.
Then, based on all this feedback, some of it helpful, some of it less than helpful, and on your motivation to buy the home—any home—you decide to offer the list price, $565k. After all, it needs work, and you're not going to overpay. After deducting for all you'd like to do to the house, that's all it's worth—to you—based on your motivation to buy the home—any home.
But your agent tells you that, homely mutt that it is, the home will sell in the high $500k to low $600k range, depending on the number of offers. And based on the steady stream of agents he saw go through on broker's tour, and on the hundred or so people he's told (and well believes) went through each of two open houses, your agent knows the home will get offers. Lotsa offers.
And since writing an offer, even one that'll go nowhere, and plowing through an inch-thick disclosure package takes two or three hours of your precious time and his, your agent says, "Forget it. An offer at list price has a snowball's chance".
The home goes into contract quickly, and about a week later your agent calls the listing agent, merely hoping to find out the number of offers. Not only does the listing agent reveal this—eighteen—he also reveals that the offers ranged as high as $650k, although the seller took one at $630k that looked more solid.
Since the sales price won't be public knowledge for several weeks, your agent thanks the listing agent profusely for this hot tip and passes it on to you as part of your education.
You reply, "Thanks. I don't understand what all those buyers are thinking."
Your agent responds:
"They’re thinking that prices are starting to go up, and they are, but they’re still cheaper than they were a few years ago. They’re also thinking that interest rates are going to go up, and that right now rates are about as low as they’ll ever be. They’re also thinking that in a year or two what they paid for a home today will seem cheap.
"I think they're right. I think anyone buying today will be in good shape when the next down part of the cycle comes, because their payments are about as low as they can be, and these days no one is getting a loan they can’t afford. The risky underwriting that came back to bite the lower price range in the last crash doesn't exist now.
"Here's another reason people buying today will be okay: they're buying early in the up part of the cycle. It’s the people who come to the party late in the cycle, maybe because they’ve been waiting and waiting for the market to cool and it hasn’t, who'll be in trouble, because they'll buy when prices are near or at their peak and interest rates are higher than they are now.
"Then there’s the emotion that always drives real estate. People don’t buy homes because of $8000 tax credits. They buy because they really really want to own their own home. And that's easier now than it's been in a long time.
"Put it all together—cheap money, cheap homes and strong honest emotion—and it’s no surprise that entry-level homes sell quickly and with multiple offers.
"Here's a final thought. Being willing to pay what a home is worth—being willing to pay what the home will sell for in today's market, without holding back and without discounting for scary 'what if?' scenarios—meeting the market, instead of trying to make the market meet you—being able to get past your fears and limitations, and the fears and limitations of your friends and co-workers—is always the sign of a motivated, realistic buyer. And it's the only sign. Everything else—getting pre-approved, finding an agent, going to open houses, making offers—is just the preliminaries, just the warm-up for the main event.
"In every competition, there's one competitor who wants first prize more than the others, and she's the one who wins. In sports, we praise the winner for her willingness to pay the price to win, because we know that price is very high. But in home buying, we—or at least many of us—accuse the winner of paying too much. In fact, the very act of winning 'proves' she paid too much. We shake our heads in wonder and turn the winner into the loser. Then the economists, with their knack for turning common error into scientific truth, package this into something called the Theory of the Winner's Curse which, taken to its illogical conclusion, says that every winner since the dawn of competitive bidding paid too much.
"I wonder why we do that? Maybe because, in home buying, there's no 18th-place trophy?"