Housing prices can fall during a recession, but that doesn't always happen right away. Sometimes, it takes a while for home values to drop, but once they do, it gives investors a key opportunity to snag quality real estate on the cheap. And that opens the door to huge profits for house flippers as well as investors looking to snatch up rental properties.
But that doesn't seem to be happening during our current recession. Not only are home prices holding relatively steady but buyer demand seems to have surged. In fact, against the odds, bidding wars are making a comeback on the real estate market, and while that's great news for sellers, it poses a challenge for buyers.
Bidding wars are back
A good 53.7% of home purchases were subject to bidding wars in June, according to Redfin (NASDAQ: RDFN), which is surprising at a time when the economy is sluggish. But a big reason for that could boil down to the fact that there's not a lot of inventory on the market today.
What makes our current recession unique is that it was spurred by a health crisis, not economic uncertainty. As such, many would-be sellers may be holding off on listing their homes due to the tricky logistics involved. At a time when open houses require thorough planning and subsequent sanitizing, sellers who aren't in a rush to find buyers are likely putting their plans to list their homes on pause. That, in turn, leads to a shortage of available homes to buy, which explains why those looking to purchase are being pushed into a situation where they're forced to outbid one another. In fact, Redfin reports that in May 2020 (a time of year when listings tend to be abundant), the number of homes for sale was down 18.9% from the same time last year.
Furthermore, historically low mortgage rates could be driving more people to buy homes. On July 16, the average rate for a 30-year fixed mortgage dropped to 2.98%, the lowest on record.
When does it pay to engage in a bidding war?
In hot markets, bidding wars are often inevitable, both during periods of steady economic activity as well as recessions. But does that mean it's worth engaging in one?
To some extent, it might be. If you're looking to buy a home in the suburbs of a major city, now's a good time to do so. Many city dwellers are reeling from the COVID-19 lockdown and may be itching to abandon urban life in the coming months. As an investor, you have a solid opportunity to make money by flipping a house outside a major city quickly or buying a rental. If that's the situation you find yourself in, participating in a bidding war could make sense.
But remember, the more you pay for a home, the more it impacts your bottom line, so what you don't want to do is get in over your head and overspend on a home you'd likely be able to snag for a much more competitive price a year or two down the line. Therefore, do your research to see which markets are currently experiencing bidding wars and why. If the market you're targeting usually isn't loaded with buyer competition, it could pay to bide your time and wait things out.