Why bidding wars won’t necessarily elevate prices

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If you’ve been shopping for a house priced anywhere around $500,000 or less, you’ve likely seen a lot of properties draw multiple offers, including many from investors ready to pay cash.

That’s frustrated many first-time home buyers trying to get a place they can now afford. We report on this phenomenon in today’s Times.

When demand exceeds supply, prices should rise. But that’s not really happening now, and may not happen for several reasons, some of which were explained in the story.

• Supply is low now due to a backlog of foreclosures, but when those properties are repossessed and put on the market, inventory will grow.
• If prices for homes get much higher than $500,000, financing will be much more difficult for buyers. Even if those buyers wanted to pay more, many would not be able to get loans.
• Rents are attractive now, and have been going down for several months. If home prices climb too high, first-time buyers might decide to continue renting.
• Many of those investors now buying houses will be renting them out, which should put even more downward pressure on rents as the supply of rental housing goes up. In the longer term, this could discourage more investors from buying rental houses, lowering demand.

So patient buyers may eventually find a less-crazed environment for mid-priced and low-end homes. Either that or we’re at the start of another bubble, something not one economist I’ve heard of has predicted yet.

--Peter Y. Hong