Buyers Are Overpaying for Homes in 2021, Because They Have to

As it turns out, a lot of home buyers across the U.S. are overpaying for homes in 2021.

Making an offer above the seller’s asking price seems to be the current trend within the housing market. In some of the hottest real estate markets in the U.S., the majority of homes are selling for more than the original list price.

But is this a smart strategy … or financial folly?

Overpaying for Homes a Common ‘Strategy’ in 2021

According to a recent housing report, about 49% of homes sold in the U.S. during the month of April ended up selling for more than the list price. In other words, sellers are getting more than they’re asking for.

This usually happens as the result of a bidding war, where eager home buyers outmaneuver one another by making higher and higher offers. Bidding wars are a common feature in the current real estate scene. It’s a crazy market right now, and this is just the latest sign.

In some of the hottest housing markets across the U.S., more than half of all homes sold go for more than the list price. Example: In April of 2021, Austin, Denver and Sacramento all had at least 70% of homes selling above the original list price. Talk about a seller’s paradise.

In these and other highly competitive real estate markets, there’s not nearly enough inventory to meet the demand from buyers. As a result, many buyers end up overpaying for homes.

But are they really “overpaying”? That depends on your definition of the term.

After all, there is no set or assigned value for a particular house. A home is worth whatever people are willing to pay for it. Local market conditions determine the value of a property, and those conditions are driven by supply and demand. In 2021, there is plenty of demand — but not nearly enough supply.

So while many homes are selling for more than the original listing price, it’s debatable as to whether the home buyers are actually “overpaying.” Many of those who pay more than the list price will still enjoy equity growth going forward, due to the ongoing rise of home values.

What’s the Worst That Can Happen?

Many home buyers worry about overpaying for a house in 2021, or offering more than the list price. And those concerns are valid. After all, most of us can remember the results of the last housing bubble.

In the early 2000s, buyers were entering the real estate market at a time when home prices were at their peak. And when house values plummeted in the wake of the subprime mortgage collapse, many of those same homeowners watched their equity go down the drain. By 2008, nearly one-fifth of U.S. homeowners had become upside down in their mortgages, meaning they owed more than their homes were worth.

The question is, will that kind of thing happen again in 2021? Will home buyers pay a steep price for overpaying on a house?

No one can predict future real estate trends with complete accuracy. But it seems highly unlikely that home prices in the U.S. will decline anytime soon. In fact, most industry watchers and forecasters are predicting the exact opposite.

Home values in most U.S. cities are expected to continue climbing for the foreseeable future. This is due to the lopsided supply and demand situation mentioned earlier.

During the last housing bubble, we had a surplus of homes being built. Today, we have the exact opposite. Housing market inventory in many US cities have sunk to record low levels in 2021. In this imbalance is unlikely to change anytime soon. This is the number one reason why housing analysts expect prices to continue climbing for the foreseeable future.

So is it really considered overpaying if your home’s value continue to climb? Or is overpaying more of a necessary evil in the current housing market?

Meanwhile, House Prices in the U.S. Continue to Rise

Home prices in the U.S. show no sign of slowing anytime soon. With only a few exceptions, house values in most U.S. cities continue to rise at a steady pace. The rate of appreciation could slow down as we move into 2022. But the upward trend is unlikely to change anytime soon.

US home price chart June 2021
Chart: U.S. home values over the past decade | Source: Zillow.com

According to the real estate data company Zillow, the median home value in the United States rose by around 11.6% over the past year. This was reported in early June 2021. Looking forward, the company predicts additional price gains for the next 12 months as well.

Some of the hottest real estate markets have recorded even bigger gains over the past year. Austin, Boise and Phoenix have all experienced home-price growth of 20% or more in the past 12 months. These and many other major cities have seen a surge of home-buying activity at a time when inventory has sunk to record lows.

Ultimately, whether a person is “overpaying” for a house is a matter of semantics. The housing market is highly competitive right now. Home buyers have to be aggressive with their offers, if they hope to edge out the competition. In many cases, this means making an offer well above the seller’s asking price.

That’s the reality of the current real estate market, whether you agree with it or not.