Last Updated August 29, 2022
Over the past couple of years, rising prices have been the big story in real estate markets across the country.
Record low interest rates and supply chain issues definitely contributed. But there’s another big factor underlying price increases: a shortage of housing inventory.
New housing starts fell dramatically following the 2008 financial crisis and haven’t recovered since. For the past decade-plus, there’s been a shortage of new construction all across the country.
That means buyers are facing markets that are still very tight.
Rising interest rates have taken off some of the pressure. Inventory has increased significantly in some markets, but other markets remain constricted.
On top of that, higher mortgage rates mean buyers have much less purchasing power than before.
That’s the case in both Bend and Eugene, Oregon. Buyers may have more choices than they did a year ago, but the price of admission is significantly higher now.
The advice we’ll give here applies particularly to Bend and Eugene’s markets – but it also applies to tight real estate markets all across the United States.
Read on, and we’ll tell you all you need to know about navigating low inventory markets.
- What is a Tight Housing Market?
- How do all-cash buyers and investors impact you as a home buyer?
- Will there be a Housing Bubble in 2022?
- Will US Housing Prices Go Down in 2022?
- What Can I do as a Home Buyer Stuck in a Tight Market?
- How LOHR Real Estate Can Help You Navigate Oregon’s Real Estate Markets
What is a Tight Housing Market?
Traditionally, a market with more than six months of housing inventory would be considered a high inventory or “buyer’s market.” A market with less than six months of inventory is a low inventory or “seller’s market.”
“Months of inventory” refers to the total number of homes on the market divided by the average monthly purchases. So, a market with 1,200 homes for sale would have six months of inventory if an average of 200 homes sell per month.
In February of 2022, Eugene’s inventory reached an all-time low of 0.4 months. Meanwhile, Bend’s market dipped to 0.55 months of inventory, close to its all-time low.
In other words, Bend and Eugene aren’t just low-inventory markets. They’re actually super-duper-insanely-low-inventory markets.
What it’s like to try to purchase a home will depend a lot on the level of inventory in your particular market.
In high inventory markets, buyers and sellers often go back and forth on price until some compromise is reached. Sellers will be more likely to offer concessions to buyers like home warranties and closing cost credits rather than the other way around.
But in low inventory markets, the “meet ’em in the middle” approach simply doesn’t work.
Unless a home has sat on the market for some time, chances are good you’ll need to offer higher than list price. You may also need to compromise on inspection and appraisal contingencies or offer the seller rent-free occupancy after close.
Lately, there have also been reports of desperate buyers making truly outlandish pledges to sellers. Many of these examples are in good humor, but they help illustrate the frame of mind for buyers in ultra-competitive markets.
Economic Factors Influencing a Tight Housing Market
The economic conditions that emerged between the summer of 2020 and the beginning of 2022 created a perfect storm for diminished supply and increased demand in housing markets across the country.
Economic stimulus in the form of lower interest rates encouraged buyers to enter the market just as supply chain constraints and pandemic-related restrictions were putting the brakes on new construction projects.
All of that was against a backdrop of overall inflation and a surging equities market. Rather suddenly, a whole lot of new cash started pouring into the economy, whether from stock market gains or cheap financing.
This money needed somewhere to go, and that’s a big reason buyer demand increased during the pandemic.
Home prices increased accordingly. But there were other factors too.
The pandemic made it possible for many people to work from home for the first time, creating a whole group of people who could now choose exactly where they wanted to live.
Bend, Oregon was (and remains) a destination at the top of many remote workers’ lists. It’s unsurprising that Bend’s market appreciated more than the national average, with prices rising by 26% in 2021 alone.
Today’s Housing Market
In 2022, however, the situation has shifted dramatically. As of publication, the average rate for a 30-year fixed mortgage is just over 6%.
That’s a dramatic shift in just a short amount of time. Buyers who were planning to shop for homes this spring and summer have been forced out of the market.
As a result, buyer demand is down, and inventory is up about 9% year-over-year nationwide. But we’re still far from normal levels of inventory.
Indeed, the average nationwide is just 2.2 months. That means most markets across the country are still very much seller’s markets.
Rising interest rates will definitely do a lot to cool down hot markets nationwide, but the effect will be gradual rather than sudden.
How do all-cash buyers and investors impact you as a home buyer?
In the middle of 2021, rumors started to fly around that institutional investors were buying up all the single-family homes in many markets, making all-cash offers that ordinary homebuyers couldn’t compete with.
Meanwhile, purchases of second homes or vacation homes increased sharply following the pandemic. All-in-all, these trends have led to a larger portion of all-cash purchases.
All-cash offers are attractive to sellers for a few reasons. Cash sales close quicker, and there are fewer opportunities for a sale to fall through.
So, in tight markets, financed buyers have to take extra steps when crafting an offer in order to compete. We’ll have some specific suggestions later on.
You might also be interested in the podcast episode below, where we talk about how to craft a winning offer in a seller’s market.
Will there be a Housing Bubble in 2022?
Yes, mortgage rates have increased significantly throughout the middle of 2022, and that’s led to decreased buyer demand and increased inventory in most markets.
But what we’re seeing right now isn’t a real estate bubble. It would be more accurate to call it the beginning of a market correction.
Although real estate markets have seen remarkable shifts in the past several years, nothing has created the conditions that could lead to a rapid and dramatic influx of new inventory.
We are still in the midst of a nationwide housing shortage. That’s in contrast to the years leading up to the 2008 financial crisis.
New homes were being built at a record pace, speculation was rampant, and irresponsible lending practices made homeowners especially vulnerable to economic headwinds.
There’s some debate as to whether we’re headed for a full-blown recession in 2022 or else just an economic slowdown.
Equities markets have certainly started to fall back down to earth, and beyond doubt, would-be homeowners have a lot less buying power than they did before.
But a sell-off is unlikely. Those who already own homes are basically in good shape, barring unforeseen economic conditions leading to widespread job losses.
Will US Housing Prices Go Down in 2022?
If you’ve followed us up to this point, it shouldn’t come as a surprise that we expect home prices to flatten – but not drop – through the rest of 2022.
High mortgage rates are forcing some buyers out of the market – but there’s still a lot of pent-up demand in many markets.
And, while higher mortgage rates mean less buyers, they also mean less people selling. More homeowners are choosing to stay put, because it’s more difficult to find an affordable replacement property.
What Can I do as a Home Buyer Stuck in a Tight Market?
As a would-be buyer in a tight market, your first thought might be to wait it out.
If you simply can’t afford to buy a home, then you don’t really have any other choice. But choosing to wait is a gamble, and it’s good to be clear about what you’re waiting for.
Mortgage rates are unlikely to go down in 2022. In 2023, the Fed might start backing off on the kind of aggressive rate hikes we’ve seen lately, but that’s only if there are clear indicators of a recession.
If you’re waiting for prices to drop, our first piece of advice is to pay attention to inventory levels.
Prices drop when inventory rises faster than the market can handle. If that isn’t happening, prices aren’t likely to decrease.
Real estate is local. In the coming months and years, prices will drop in some markets. Certain kinds of properties will be especially vulnerable. But in other markets, prices will increase.
Our advice? The decision of whether or not to enter the market should be a personal one, based upon what’s best for you and your family. Needless to say, it also needs to be based on what’s feasable given your current financial situation.
If you do decide to shop for a home, you’ll need to have a gameplan. That’s especially true in markets with a lot of competition.
Don’t worry – in the following section, we’ll offer advice on how you can successfully navigate tight real estate markets.
Tip 1: Know What You Can Buy
Interest rates are on the rise. That means the purchase price you’ll qualify for will be lower than it was a year or two ago, unless your income has increased.
So our first and most important bit of advice is to get prequalified, preferably with a local lender. Know how much purchasing power you have. Otherwise, you’ll be fumbling around in the dark.
But just because you can qualify for a $400,000 purchase doesn’t necessarily mean you can start shopping for $400,000 homes.
Depending on what you’re looking for and where you’re shopping, there’s either some chance or almost a guarantee that you’ll have to offer above list price.
A real estate agent can help you calibrate your financial means with the reality of the market. We’ll go into more detail further down.
For now, the most important takeaway is not to start out with an unrealistic image of what you can buy. Purchasing a home in a tight market takes a lot of energy and determination, and you’ll want to pick your battles carefully.
Tip 2: Patience and Persistence are Key
In tight real estate markets, you can do just about everything right and still not win out over other offers.
A lot of the time, it’s just a matter of another buyer offering more than is reasonable. Even in a competitive market, you don’t want to overpay, and you shouldn’t have to either. But how much is too much is a completely personal decision.
Escalation clauses can be a helpful tool in that respect.
Basically, an escalation clause allows you to make an offer that can vary depending on the other offers a seller receives. You might offer, say, $3,000 above the best competing offer, but you can also set a cap at a certain amount so you don’t stretch your finances too far.
There are nuances, however. Be sure to ask your agent about the potential risks of using an escalation clause.
In general, you probably won’t know how much you’re ready to put on the table until you’ve got a few offers under your belt and have been in enough homes to know which features are really important to you.
Purchasing a home in a low inventory market is a process.
You might get lucky and get an accepted offer quickly. reMore likely, though, you’ll need to be in it for the long haul.
Tip 3: Know How to Sweeten the Pot When You’re Making an Offer
There’s no denying that offer price is the most important consideration when presenting an offer for a home.
But in competitive markets, dollars and cents alone won’t necessarily be enough to get you across the finish line. That’s especially true if you’re making a financed offer.
It’s crucial to have some sense of what makes a seller tick.
Sure, cold hard cash is probably pretty high on the list, but there are plenty of extra considerations that can help push your offer over the top.
Rent-free occupancy after close could be a big pot-sweetener. So could waiving the right to ask for repairs.
We virtually never recommend that buyers waive the right to an inspection. It’s cheap insurance that will keep you from inheriting any catastrophic issues.
But sellers often want a pledge from buyers that they won’t ask for relatively minor repairs. You’ll still have the leeway to back out of a sale and get your earnest money back so long as you don’t waive the contingency entirely.
After a brief ban, buyer love letters are back on the table in Oregon. A good rule of thumb when writing a letter to a seller is to focus less on you and more on the seller and their home.
Everyone loves a good compliment, and if your letter hits the right notes, it may very well help your case.
Sellers won’t necessarily read buyer letters though, especially if they have to sift through fifteen or twenty of them.
The Ins and Outs of Appraisal Contingencies
We also need to talk about appraisal contingencies.
One of the biggest sticking points of a financed offer is the requirement that a property appraise at or higher than the purchase amount. This becomes a potential issue when you’re offering significantly over list price.
In tight markets, sellers will often ask financed buyers to agree to pay cash to make up the difference between the appraised value of a home and their purchase price.
If the gap ends up being too big, you’ll have to back out of the sale and forfeit your earnest money.
That’s a lot of time and money potentially down the drain. So, we recommend buyers exercise caution.
Rather than waive the inspection contingency entirely, it’s usually better to set a hard cap on how much extra cash you’re willing to bring to the table.
Tip 4: How Your Real Estate Agent Can (and Should) Help
Real estate agents get a bad rap these days, and we totally get it. Buyers have more tools than ever to help them navigate the market on their own, and that’s a good thing.
But agents can also help in ways that are sometimes easy to overlook.
Part of a Realtor’s job is know the local market inside and out. Your agent should be able to give you a sneak preview of everything you’re in for if you decide to go after a particular home.
Additionally, they shouldn’t be afraid to steer you to better options if a particular target just doesn’t fit your needs. Everyone needs a reality check every once and a while.
Another part of an agent’s job is to be able to leverage their relationships with local professionals. That includes local lenders, escrow agents, inspectors, appraisers, and other professionals who need to be counted upon to ensure that the entire process runs smoothly.
It also includes the agent on the other side of the transaction. In some sense, the relationship between agents on either side of a transaction is adversarial by design.
But agents also need to work together in order to put a sale together. It’s a delicate balance.
Listing agents have a vested interest in presenting the best possible offer to their client. So, your Realtor needs to be proactive in finding out how to make an offer that puts you in the best position to win the day.
They also need to present you and your offer in a way that instills confidence in the other agent. Bascially, your Realtor needs to advocate for you at every step of the process.
That’s a crucial component of making a successful offer in a competitive market.
How LOHR Real Estate Can Help You Navigate Oregon’s Real Estate Markets
Many Realtors will simply tell you, “Work with me, I’m the best.”
We could spend a lot of time going into all of the reasons that we are, in fact, the best. But that’s actually not what’s important when it comes to choosing a buyer’s agent.
Simply put, your agent needs to be someone who you can trust.
That’s something you can’t decide based on what other people say. We always recommend that buyers (and sellers) interview multiple agents.
Upon meeting a potential agent, trust your own gut more than whatever sales speak you might hear.
In order to effectively guide you through the process, your Realtor needs to get to know you. They need to understand who you are and why you’re buying a home.
Needless to say, your agent also needs to have the knowledge, experience, connections, and work ethic necessary to get the job done. An agent should earn your trust in part by demonstrating those qualities.
But it’s also important not to take yourself out of the equation. This is about you and your process, and hopefully ending up in a great home at the end of it.
All of our agents at LOHR Real Estate are, first and foremost, attentive to the needs of our clients. Don’t just take our word for it, though.
We’re here to help, wherever you are in the process of buying or selling a home.
Click the “Contact Us” button to the right, and you can decide for yourself whether or not we’re a good fit for your situation.