How strong is the residential market?
Well, according to people looking to buy and folks looking to sell, very strong. In fact, many residential properties put on the market sell for more than the listing price. Indeed, many times there are bidding wars. All this is fine until the winner of the war applies for a mortgage.
The gulf between contract prices and appraised values highlights the risks to buyers in the current market, especially those stretching their budgets to win a bidding war. Mortgage lenders will typically lend only enough to cover the appraised value of a home. So, when an appraisal comes in below the contract price, the buyer has to make up the difference, renegotiate the price or let the deal fall through.
Many buyers are plunking down payments of just 5% to 10% because they need extra case available in case the house is appraised below the sales price. Lower down payments require buyers to take on more debt and can make them less competitive in bidding wars.
Appraisers typically use the market data approach, or as it is more frequently referred to, the comparable sales approach. But the comparable sales approach depends on recorded closed sales which can lag in a fast-moving market. The recorded sales can reflect value agreed to several months earlier. A good definition of a fair market sale is the price a willing seller under no compulsion to sell and a willing buyer under no compulsion to buy agree on.
So, an appraiser will employ a considered approach to valuing a home that over time is more accurate than the price offered by a buyer during a bidding war. A survey by the National Association of Realtors showed that 12% of contracts terminated because of the failure to obtain an appraisal to support the contract value.
Even now, the market remains robust. An article published in “6sqft” on October 6, 2021 reports that Manhattan apartment sales hit a 32 year high. The market reflected the highest quarterly volume total ever recorded. The sales surge was driven by rising vaccine adoption, low mortgage rates, and improving economic conditions.
Another notable figure is the increase in the number of bidding wars which are the sales over the listing price. In Manhattan, bidding wars sales rose to 8.3 percent, its highest in years. The boom has been described as a catch-up. All the suburbs were booming while Manhattan was seeing less sales. Now there is a massive surge. For other types of properties, the increase in price has also been record making. Townhouses increased this year by 18%. In short, if you are a seller of residential property, you are in a good place.