Home Buyers Throwing From The 3 Point Line May Not Be Hitting “The Drain”

Fox Rothschild LLP

Fox Rothschild LLP

For better or for worse, divorce lawyers get a front row seat to the home real estate market because their business often involves selling a family’s most prominent asset.  The last 12 months have made for an exciting game as home prices have hit seemingly impossible highs, driven by crazy low interest rates and a surge in demand that is not easily explained.

Clients and realtors are reporting that homes are commanding multiple bids.  In a day when homes can now be toured via the internet, it is not uncommon for a home to have hundreds of views per day.  Buyers and sellers are both reporting market fatigue with the former having to structure bids with price escalators that go far beyond asking price and sellers have to interpret those bids and spend days away from home while hordes descend to see the residence “live.” The market has not been this active since 1987 when buyers often camped out at a residence at dawn on the morning a house went on the market.

But some of the offers that we are seeing come pregnant with problems.  Many buyers are waiving home inspection clauses, but few can avoid the mortgage contingency and the appraisal it requires.  Historically, homes appraised based upon transactions that had closed.  We understand that appraisers are getting the green light to use signed contracts instead because home prices are moving so fast, especially in the $300-500,000 range.

We are also hearing stories of buyers tying the knot to buy a house but then defaulting on the transmission of the down money that is typically due in 3-5 days.  This seems to reflect a buy first think later mentality.  Then we have seen a transaction where the offer exceeded asking price, but the sale price would be adjusted to conform to the lender’s appraisal.

Some of this is clearly frenzied buying based on low interest.  Real estate economists in New Jersey are reporting 12% annual increase in 2020 and 2021 and predicting another 3% in 2022.  Pennsylvania seems to be following suit.  Economists note that for each percentage point increase in mortgage rates the buyer’s buying “power” declines by just under 9%.  A small 3-4% correction in home prices is forecast in 2023.  What seems so curious about this market rally in home prices is the fact that it is heavily concentrated in more modestly priced homes.  The market for a house over $1 million is certainly active, however, in the Philadelphia region buyers at that level seem far pickier about the bids they place.

We have also detected that a lot of the buyers in the lower end are looking to fix and flip older homes in established neighborhoods.  These investors are working a narrow time space because increased interest rates could vastly erode the pool of eligible buyers able to qualify to acquire the flipped house.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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