Boom or Bust: How the Exploding Housing Market in Houston is Complicating Matters for Buyers and Sellers

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We never expected to find a home as quickly as we did. When my fiancée and I started looking, we assumed we would casually search until after our wedding in October, then get serious. But as we watched interest rates slowly begin to tick upward, we decided to speed up the process. Even then, we assumed it would take weeks or months to find a home. How could we have known it would only take one day?

The Houston housing market is booming. In the last year, home sales have shot up by 28 percent and prices have risen by 11 percent as of May. The combination of low interest rates (they are still historically low despite rising over a point in the last two months) and still relatively low housing costs compared to most of the country -- nevermind a steadily growing economy and a rebound from the housing bubble of 2008 -- are sending prices and sales higher than ever. But, this is fueling concerns over the return of a housing bubble.

Real estate website Trulia recently reported that homes in Houston were as much as 2 percent over-valued in the current market, but cautioned that this is simply a rebound, not another bubble, not yet.

"I don't think we are on the cusp of a bubble," said Sharon Wright of SSW Fine Properties, a 15-year veteran of the Houston real estate market. "I think [the market] is going to level out by the end of this year."

But with high home valuations come real problems for potential homeowners, like me. After finding a house we truly loved, we made an offer that was accepted. Admittedly, the offer was high (just over the list price), but there was another offer sheet on the desk of the listing agent the same day as ours. Competition is high and it is not uncommon for agents to receive multiple offers for homes within days of the house hitting the market, particularly in desirable areas inside or just outside the loop.

"The last three months, I've been doing this seven years, it has never, ever, ever been like this," said Michael Fischer, an agent with Champions Realty. "There's not as much inventory [as in previous years] and since the rates are low, the demand is just crazy."

Fischer even did something he'd never done this year. He assisted a buyer in putting a bid in on a home before even looking at it in person.

We didn't go that far, but when our bid was accepted and the inspections cleared with few problems, we felt we were on our way to closing until the appraisal came in. Since the housing bubble of 2008, the government has tightened its restrictions on how lenders and appraisers work together. Prior to the new rules put in place after the housing boom went bust, lenders could handpick appraisers and let them know they wanted a favorable appraisal. Since the lender was the one ultimately taking the risk, houses were often overvalued, which led to problems for homebuyers during the recession.

Now, lenders are randomly assigned an appraiser from an approved pool of companies, making it much tougher to get the value on a home. Appraisers look at home sales over the last year in the same neighborhood. They are looking for comparable home sales on which to base their appraisals. But, with the exploding housing real estate market in Houston, appraisals can come in under the sale price jeopardizing deals.

"The process has become very difficult for all of us," Wright said. "We used to go to the mortgage companies, they would have a select group they would choose from and they would have appraisers that would know the area. Now we have appraisers from Pasadena going into Garden Oaks."

Taff Weinstein, a mortgage broker and owner of First Imperial Mortgage, believes that there may have been some overvaluing of homes, but not enough for the federal government to impose the kinds of restrictions now seen in the industry. "The government thinks they are going to fix the problem," he said. "They went about it right with about 50 percent [of the changes] and the other 50 percent were out of left field that have not, and will not fix the problem."

With the new restrictions, leasing agents must be particularly careful in studying the area where a home is being sold. They must find comparable properties sold in the last year to justify their list price. That can prove to be complicated if, in a neighborhood like the one where we were looking, hasn't had a comparable sale in the last few months when prices have been highest. Lenders will not give a loan for higher than the appraised price, so agents have an incentive to be conservative in their pricing strategy.

"You can't just throw [a list price] on paper and hope it sticks," Weinstein said.

Wright added, "You can get offers all day, but it doesn't mean it is going to appraise. The appraisers are not able to keep up with the increases."

If an appraisal comes in below the list price, the difference must be negotiated between buyer and seller. Most of the time, that is a relatively small amount, maybe 5 percent of the sale price, leaving room the remainder to be either paid in cash by the buyer or for the seller to drop the price without too much pain. In our case, it was nearly 20 percent lower than the sale price, leaving a gaping hole of cash between us and the seller.

Fortunately for us, our seller chose to compromise and we were able to come up with extra cash to make up the difference. But, getting to that point was nerve wracking and the fact that the process is so overwhelming didn't make it any easier.

As soaring home sales continue, buyers and sellers are going to have to be careful. With houses often receiving multiple bids within days of the house going on the market, it can be tempting for listing agents to price homes high and for buyers to be aggressive with bids, but if it doesn't make an appraisal, it doesn't matter what the list price was or if the house would seem to be worth the money.

"I show [clients] the numbers [from the market analysis], and if [their desired list price is] too high, I tell them, 'You can put any price you want on it, but even if you get an offer, it has to appraise,'" Fischer said. "[Sellers] are taking a big gamble."

That gamble can result in big disappointment for everyone. In my case, the story had a happy ending, but getting there felt less like a fairy tale and more like a mystery novel.

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