Mansion Global

Most markets have yet to show signs of slowing, but demand could hit a tipping point in the second half of 2021.

In Miami-Dade County, inventory for single-family homes priced over $1 million has decreased 37% over the past year. FRANCKREPORTER / GETTY IMAGES

Last year was nothing if not gangbusters for luxury markets across the U.S., and that momentum has carried into 2021, even in areas that would traditionally experience a slow season in January and February.

A large part of what’s driving prices upward is a chronic lack of inventory, with many sellers unwilling to part with properties or navigate a move in the middle of a pandemic, and in a sales market that’s currently so tight.

“What we’re hearing from our agents is that a lot of people who might be interested in selling aren’t, because they don’t know where they would move next since the market is so heavily slanted towards sellers,” said Redfin chief economist Daryl Fairweather.

According to a recent market report from Redfin, homebuyer demand is up 60% year over year, while 13% fewer homes are being listed.

“The big question is how high prices can go,” said Scott Durkin, president and chief operating officer of Douglas Elliman. “We’re having inventory shortages in all our markets. And [low interest rates] give buying power to buyers, and give sellers power to ask for a price they couldn’t get in a different market.”

All of this translates into serious leverage for sellers who are game to get into the market right now, while inventory remains so low, and other sellers have yet to enter the fray.

Though demand is expected to remain strong throughout 2021, an eventual increase in inventory, a waning pandemic, and a possible increase in interest rates in the second half of the year might translate into a more balanced market with fewer bidding wars. Redfin forecasts the potential for a “slight chill to the scorching-hot seller’s market.”

Tight Inventory Limits the Competition

Particularly in the booming single-family home market, inventory has evaporated over the course of the past year, creating a prime opportunity for sellers to list without facing much competition.

“We’ve never seen inventory as low as we have [this year],” said Candace Adams, president and CEO of Berkshire Hathaway HomeServices New England Properties, Westchester Properties and New York Properties. “Inventory is very low, and pending sales are double what they were a year ago.”

“And we have massive buyer demand,” Ms. Adams said. “What you’re seeing is a buyer will bid on a couple properties and lose, then on the third or fourth they start to bid up.”

In Miami-Dade County, inventory for single-family homes priced over $1 million has decreased 37% over the past year, said Ron Shuffield, president & CEO of Berkshire Hathaway HomeServices EWM Realty, while the pace of sales has increased by 120%.

“That’s what any home seller wants to see, that they have less competition and more buyers,” said Mr. Shuffield, who’s based in Miami. “The thing we’re already concerned about is, what are we going to do when we run out of inventory?”

Part of the issue is that many high-net-worth buyers are keeping their options open, purchasing new homes without selling their other properties.

“Many of the areas that people are buying in were second-home areas, and now they’re becoming primary or co-primary areas,” Mr. Durkin said. “Buyers are absorbing the inventory and just keeping what they have, owning two or three homes.”

For sellers, this means carefully considering your options before making a move, whether that’s downsizing or taking the proceeds from a sale to a cheaper market where your money will go further.

“We’ve had several deals that have fallen apart because the seller backed out, because they had nowhere to go,” Mr. Durkin said. “When you sell in a high market, you can’t trade up in the same market. Sellers are thinking, ‘What’s my plan, what do I do?’ Maybe you sell on the east coast then migrate to Florida or Texas, buy something where your money would go a long way.”

But the natural appeal of a full-blown sellers’ market is likely to eventually draw more listings—and therefore more competition—eventually.

“We think with this robust real estate market, it’s already unlocked demand, and it’s going to start unlocking some supply as well,” said Philip White, president and CEO of Sotheby’s International Realty. “If you’re a homeowner and your price just went up 25% and you’re thinking about moving somewhere, that’s pretty compelling.”

Bidding Wars Drive Sale Prices

The heat of the current market has unquestionably meant that some sellers have achieved prices that might have been unattainable even a year or two prior.

“Right now, prices of newly listed homes are up 10% year over year, and the number of homes going off the market in under two weeks is up 9% year over year,” Ms. Fairweather said. “It seems like sellers are pricing higher, and [the market] is not penalizing them yet.”

But there are still limits, and properties that are priced too ambitiously will still wind up sitting on the market, or accepting a lower offer.

“Even on properties that are getting multiple offers, the buyers are offering what they think is an appropriate price for the property,” said Sally Forster Jones, executive director of luxury estates with Compass in Beverly Hills. “We’re having a lot of activity, but buyers are price sensitive and are very thoughtful about what they come in with when they make an offer.”

In Miami’s booming market, “You have to be realistic, you can’t just price your house to outer space, because it will sit on the market even if it’s a beautiful home,” said Tony Rodriguez-Tellaheche, co-founder of Prestige Realty. “Buyers aren’t dumb.”

Still, in most luxury markets, pricing on par with recent comps will leave a property well-positioned for potential bidding wars, potentially pushing prices beyond the initial asking, and closer to the more ambitious number a seller originally had in mind.

“Overpriced properties are still going to sit there,” Mr. White said. “Whatever the comparables are, price it right there, then have your agent negotiate multiple offers. That’s how you’re going to get the best price in my opinion, by creating a competitive environment for your property.”

Beyond pure pricing, some sellers are also capitalizing on the current moment to structure deals that are as advantageous as possible.

“We find that sellers are reviewing terms now more than anything,” Ms. Adams said. “Is [the offer] all cash, how quickly can someone close, are there contingencies. They’re getting rid of any potential impediment” to a sale.

A Shifting Landscape Later in the Year

Though no experts are forecasting an abrupt sea change in U.S. sales trends in 2021, market dynamics are expected to shift somewhat by the latter half of the year to create more balance. And sellers looking to take advantage of high demand and low inventory would do well not to wait.

“I want to get on the rooftops and start shouting, ‘If you’ve even thought about selling, please let us know,’” said Kristin Malfer, an agent with ReeceNichols/Luxury Portfolio International in Kansas City. “If a house is ready to go and moderately updated and on a nice lot, it’s going to sell.”

Sooner or later, a critical mass of sellers will recognize the opportunity and enter the mix themselves, giving buyers more options and sellers somewhat less power.

“Eventually the high prices will draw more people to list,” Ms. Fairweather said. “It’s happening already, but will happen more the higher prices go. At the same time, there is more new construction hitting the market.”

All of which means that sellers who have their eyes on bidding wars and speedy transactions should consider starting the listing process as soon as possible.

“I think once vaccines are plentiful,” Ms. Adams said, “we’re going to see more properties come to the market.” .

“By summer, I think we’re going to see a nice, balanced market,” she added. “You just know in your gut there’s a huge amount of pent-up seller demand.”