Bidding wars were something that were uncommon in the 1980s and 1990s, but they took place frequently during the housing bubble. However, what’s surprising is that they haven’t disappeared after the housing slump, and they are still going strong in a few areas.
Based on data from the National Association of Realtors, researchers at the University of Toronto’s Rotman School of Management discovered that bidding wars took place in about three percent of sales prior to the bubble. At the bubble’s peak, 30 percent of homes bought in Washington, D.C. and 26 percent in Los Angels were involved in bidding wars.
It is believed that although this new way of buying and selling houses gained purchase during the housing bubble, it isn’t exclusive to it. Experts have suggested that this is a new way of selling homes; it has long been common practice in Australia to purchase a home through an auction process, so there is no reason for it to not become the norm in the U.S.
However, there are some potential downsides for inexperienced or first-time buyers. There are two ways that a seller can list a home: with an aspirational price or with a price aimed to create a bidding war. Aspirational prices are those that a seller would like to get but anticipates will be negotiated down. Prices designed to create a bidding war are generally less than what someone is willing to accept and are expected to rise as sellers compete. When buyers are unsure of which price they’re looking at, it can create confusion as to the actual value of a home and whether they can actually afford it.