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Bidding Wars are Back


Competition and bids over asking price drive up median prices

If you have been thinking of selling your home, you are likely watching the recent dynamics of the real estate market closely to see where it is headed.

The past two quarters have seen significant increases in the number of sales and median prices of single family homes and condominiums, both month-over-month and year-over-year trends.

At the close of the first quarter in 2013, all market indicators are signaling that the pressures that lead to competition and price increases are getting stronger. * Inventory levels for single family homes at the end of 2012 were the lowest ever recorded and inventory for condos kept dropping to hit a record low at the end of March 2013. Low inventory increases competition, because fewer properties are available to satisfy buyer demand.

* Low interest rates stretch buyers’ power. Current rates have hit an historical low, motivating buyers to capitalize on how much their dollar can buy. In addition, they have enabled buyers who were previously unable to buy to enter the market. Since rates have been artificially depressed, experts are speculating as to how long they will last.

* The number of annual sales is a leading indicator of price pressure. In 2009 when the recession hit, Oahu’s volume of sales hit a 10-year low of 6,140 sales. Sales have been climbing since, with 2012 closing at 7,400 sales. Experts project 2013 to garner around 8,000 sales.

* The number of days that it takes for a property to sell indicates the market velocity. Current days on market is approaching the record lows set in 1978 and 2005, years that coincided with historic price runs.

“The combination of record-low inventory with interest rates at historic prices has led to new competition for properties … and competition drives up prices,” says Scott Higashi, EVP of Sales at Prudential Locations. “As a result, we’re seeing an increase in the percentage of sales bid-up across most neighborhoods and price ranges.”

A “bid-up” occurs when a property receives multiple offers and then sells for more than the listed price. As the percentage of houses that sell over their asking price increases, median prices increase overall.

The highest percentage of bid-ups in the first quarter of 2013 is in the $300,000 to $400,000 range, where more than 1 in 3 listings sell over the asking price. “The influence of bid-ups often works like ripples in a pond,” Higashi says. “They start strong in the lower price ranges, then move out through other price ranges. Bid-ups may lead to higher future listing prices, as they suggest that the market will support higher prices. ”

He adds that Prudential Locations has a proprietary system to track bid-ups by location and price range, “so that we have a finger on the pulse of each neighborhood market and our agents can respond accordingly.”

A 35-year look at bid-ups illustrates how the competition of multiple offers drives up prices. Historically, Oahu’s most recent price runs were 1978-1981, 1986-1990 and 2001-2007. With each price run, the increase in prices closely followed the increase in bid-ups.

At the end of each run, housing prices approximately doubled what they were at the beginning of the run. During these price runs, properties appreciated as much as 20-25 percent per year during the peak of their velocity.

So what does this mean for today’s buyers and sellers? If history is poised to repeat itself, then for buyers there is no time like the present.

For sellers however, waiting for prices to increase might not necessarily be the best move.

“If you want to move up – which most people who sell want to do – it’s important to realize that price pressures affect both the home you’re buying and the home you’re selling,” says Higashi. For example, at a 10 percent annual price increase, a $500,000 property appreciates $50,000 while an $800,000 property appreciates $80,000. Waiting a year to move up from the first property to the second will cost the seller $30,000.

“Once a run starts, the percentage of price increases is fairly equal across price ranges. That’s when a low cost of money – your interest rates – can help you. In the past 30 years, interest rates have averaged 7.6 percent, or double what they are today (3.5 percent). People forget that in the 1980s they were as high as 18 percent.”

Data from Honolulu Board of Realtors MLS Resales and Prudential Locations.

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