How are buyers coping in a highly competitive housing market that is experiencing a historically low supply of homes on the market? Data from the REALTORS® Confidence Index Survey1 indicates that buyers are turning to the power of cash, putting 20% or more in down payment, or simply not making an offer if there are already multiple offers on a property, leading to a widening wealth and income divide among those who are already financially wealthy and those who have not built up wealth, which mainly comes from homeownership in the first place.
Intense Competition: 5 Offers on a Home Sold in March 2021
In March, there were nearly five offers for every home sold, an increase from just nearly three offers in 2018 and nearly two offers in 2019 and 2020 at this time of the year. In the state of Utah, REALTORS® reported an average of seven offers per home sold. In Arizona, Georgia, New Hampshire, and Washington, there were six offers per home sold. And in California, Colorado, Tennessee, Texas, there were five offers per home sold.
Rising Share of Cash Buyers, at 23%
In a highly competitive environment, buyers are increasingly turning to cash to make their offer more attractive. The share of cash sales has trended downwards since 2013, but it appears to be rising again, to 23% in March and to an average of 21% of sales in the first quarter of 2021, up from 18% in 2020. Buyers are offering cash to reduce the chance of rejection. Of the cases reported by REALTORS® who had clients whose offer was not accepted, the presence of another bidder making an all-cash offer was the second largest cause their client's offer was not accepted, accounting for nearly 1 in 4 of unsuccessful offers. Other buyers making a higher offer is the major cause of rejections.
Rising Share of Buyers Who Put Down 20% Down Payment, at 48%
Homebuyers are also increasing the attractiveness of their offer by putting in a higher down payment, which increases the chance of a borrower obtaining a mortgage and reduces the risk of a transaction falling through because the borrower could not obtain financing. According to REALTORS® who provided information on the down payment made by their clients, 48% of homebuyers made a down payment of at least 20% in the first quarter of 2021, compared to 46% in 2020 and just 40% in 2011.
Among first-time buyers, 27.8% made a down payment of at least 20% in the first quarter of 2021, a higher share compared to 25.9% in 2020. About a decade ago, only 22.9% of first-time buyers made a down payment of at least 20%.
So ironically, even with the GSEs offering 3% down payment loans, a higher fraction of first-time buyers are obtaining loans with at least 20% down payment, which could be explained by buyers trying to avoid paying a mortgage insurance premium. Nationally, the median existing-home sales price rose by a record-breaking 17.2% in March 2021 to $329,100. At a typical down payment of 10% and closing cost of 3% nationally, a buyer needs to have $42,783 in cash to make a home purchase, which is equivalent to 13 years of the median financial savings of a renter of just $3,100 (Federal Reserve Board 2019 Survey of Consumer Finances).
Hawaii (Honolulu), California, Washington, Oregon, the District of Columbia, Virginia, and New Hampshire are states where one needs at least $50,000 to buy a home based on reported prices, down payment, and closing costs gathered from the REALTORS® Confidence Index Survey.
1 in 3 Buyers Who Did Not Make an Offer Didn't Want to Compete with Other Offers
One other way buyers are coping in a highly competitive housing market is to step away and not make an offer. Among reported clients who decided to not make an offer on the property, 35% of those reported cases did not make an offer once they knew there were already multiple offers on the property. This could be because they could no longer make a bid that was below the listing price or anticipated escalation clauses.
Supply Outlook is Improving
Supply will remain tight given the huge gap between a desired 6 months of inventory of homes on the market compared to the current 2.1 months. But the supply outlook is improving. Housing starts rose to 1.7 million in March and housing permits are averaging at 1.8 million in the first quarter of 2021. Sellers who have been hesitant to list homes as part of their personal health safety precautions may be more encouraged to list and show their homes with a population mostly vaccinated by the mid-year.