3 Reasons Why Bidding Wars Will Ease This Year

The Motley Fool
The Motley Fool

Bidding wars were the norm in 2021. In fact, at one point last year, Redfin reported that 72% -- nearly two in three -- of its buyers faced one. (In some markets, the share was up to 83%.)

These bidding wars made an already challenging, pricy market even more so. Buyers were forced to waive contingencies , skip inspections, and offer well above asking price just to get their foot in the door. And even then, winning out on a property was difficult -- especially with the surge of all-cash offers upping the competition.

Fortunately, it looks those days are behind us. In November (the most recent month available), the bidding war rate hit its lowest point since 2020, with just 60% of buyers coming up against one, according to Redfin's data.

Images source: Getty Images.

Will the trend continue as we get further into 2022? Can buyers expect a less competitive market as they look for properties in the new year? It looks like the answer is yes. Here's why.

1. Mortgage rates are rising

Just this week, rates on 30-year loans clocked in at 3.45%, marking a 40-basis point jump in the last three weeks. This time last year, the average rate was a mere 2.79%.

Unfortunately for buyers, most experts predict a continued rise in rates as the year goes on. Some are more optimistic, predicting average rates around 3.2% by 2022's end ( Fannie Mae ), while others have a more bullish view, projecting 4% for the year (Mortgage Bankers Association).

However you slice it, rate increases are probably in the cards -- and they'll likely dampen buyer demand to some extent. And fewer buyers? That means fewer bidding wars and an easier market for those still hunting for a home.

2. Inflation has many buyers pulling back

It's no secret that inflation is on the rise. In fact, the Consumer Price Index increased 7% over the last 12 months as of December, marking the highest inflation rate seen in nearly 40 years.

The steep jump has many consumers worried, and in the real estate market, even pulling back on their homebuying dreams entirely. According to a recent Redfin survey, a whopping 29% of respondents said rising inflation has caused them to delay buying a home. Another 11% have given up on homebuying altogether due to it.

As with rising rates, this is just another factor that should help ease competition and reduce the number of bidding wars that today's remaining buyers are faced with.

3. Supply is expected to increase

Extremely limited housing supply had a lot to do with last year's high-stakes housing market. And while 2022 won't see demand and supply align quite yet (that would take about 4 million more homes, according to Freddie Mac ), we should start to see inventory creep up as the year goes on.

Redfin predicts new listings will surpass 7.6 million in 2022, the biggest share since 2018, while is betting on a 0.3% increase in inventory for the year. It sounds small, but compared to the 18% downslide seen in 2021, any little bit helps.

Increasing construction will also alleviate some of the pressure on supply. While there are still many headwinds (skilled labor shortages, rising material costs, increasing insurance premiums, etc.), the National Association of Home Builders projects 830,000 new single-family starts this year  -- up from just 759,000 in 2021. It's a decent improvement, but remember: The market's still woefully short on supply, so don't expect a huge influx of properties anytime soon.

It's not the end for bidding wars

Bidding wars should get fewer and further between this year, making things a bit easier for buyers and real estate investors to get their feet in the door. But a buyer's market? That's definitely not in the cards, and many consumers could still face competition -- particularly in some of the nation's more in-demand markets -- hello, Tampa !

If you're on the hunt for a property this year, it's still a good idea to come pre-approved (or with all cash) and to be ready to make your best offer from the start. You should also enlist an experienced local agent who can guide you on the best ways to stay competitive in your unique market.

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Aly Yale has no position in any of the stocks mentioned. The Motley Fool owns and recommends Redfin. The Motley Fool recommends the following options: short February 2022 $65 puts on Redfin. The Motley Fool has a disclosure policy .

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