The housing market has been on a steady rise since bottoming out in 2008. Since the beginning of the pandemic, record surges in home prices have prompted many economists to calculate the imminence of a housing bubble. With real estate prices growing at a rate of four times the national average income, experts are now warning that the housing market is cooling.

A Housing Bubble?

Real estate bubbles occur when demand greatly outstrips supply, resulting in an escalation of home prices, according to Rocket Mortgage.  In like-markets, buyers are often forced to settle for limited overvalued properties.

By historical comparison, overvalued homes have a large effect on the housing market. In the past decade, the price of real estate increased steadily. Recently, workers were required to stay and work from home, indirectly affecting the valuation of properties during the Pandemic. In some places, like Miami and Austin, home values have surged so greatly that it has outpaced the national average.

In April, Realtor.com reported a slow down in housing demand. The real estate internet company realized an increase in inventory, citing that more homes have sold in 4 of the 5 weeks that ended that month.

What Does the Data Show?

CoreLogic, a real estate data firm, assessed that 67.9 percent of 392 U.S. regional housing markets were overvalued. With housing price reductions hitting several markets, the company now reports that only 24.5 percent of U.S. housing markets are normal and 7.6 percent are undervalued.

Among the 392 regional housing markets measured, CoreLogic has found only four markets to have a “very high” likelihood of a price drop: Bend, Oregon; Prescott, Arizona; Lake Havasu City, Arizona; and Bridgeport, Connecticut.

Opposing CoreLogic’s analysis, Moody’s Analytics believes that 96 percent of the 392 regional housing markets are “juiced-up,” stating the markets that are most likely to see price drops include: Markets in Colorado such as Colorado Springs, Fort Collins, Greeley, and Denver; Boise, Idaho Falls, and Coeur d’Alene, Idaho, Las Vegas; Jacksonville, Tampa, and Lakeland, Florida; Atlanta; Sherman, Texas; Longview, Washington; Charleston, South Carolina; Albany, New York; Clarksville, Tennesee.; Greensboro and Charlotte North Carolina.

In May, the average household income in the U.S. was $87,864, according to data by Zippia. Mortgage rates have been hovering at 5 percent compared to its 3 percent average rate in January.

Lumber costs, new home sales, existing home sales, and mortgage applications are all plummeting. Inventory is increasing, while homes sit in the market much longer, all indicative that the housing market is cooling.

The Housing Market is Cooling – Should Homeowners worry?

Naturally, the answer is no. However, a slow down in housing demand does indicate that home prices may not continue to rise at the same pace as they did since the pandemic. Additionally, while home prices are falling, there are still many areas that are undervalued.

Homeownership is a popular choice for many Americans. And although U.S. home prices have become more expensive than the average household income, experts suggest that the market will grow by another 5.9 percent over the next 12 months.

The home-buying market is getting more competitive as Wall Street investors mobilize into the single-family housing sector, driving up the price of real estate.

Research by the National Association of Realtors indicated that institutional buyers accounted for 15 percent of residential home purchases in 2021. Texas had the highest fraction of purchases with a market share of 28 percent, followed by Georgia at 19 percent.

Moreover, eighty-four percent of states have seen an increase in the number of investors buying residential homes from 2020 to 2021, including Mississippi, Colorado, and Florida.

As families look to buy new homes, they’re facing tougher competition from buyers who have a lot of cash and are securing single-family homes to make them rental properties.

An estimated 80,000 homes worth $50 billion were purchased by institutional buyers in the fourth quarter of 2021, according to the latest data released by Redfin. Homes in the mid-priced range have gained popularity with investors, representing 32.3 percent of their purchases in the fourth quarter, up from 24.1 percent a year earlier.

While rental-ready opportunities garner the interest of investors, there are a number of other factors that attract deep pockets to a specific real estate market.

Markets yielding a 40 percent appreciation in the last decade and an average of 12 percent in sales activity are highly considered. Additionally, investors are attracted to markets where rents have increased more than 30 percent on average in the past decade and where households earn more than $60,000 annually.

Buyers are battling multiple offers as institutional investors storm through the competition.

Yesterday, U.S. Senators Elizabeth Warren (D-Mass.) and Jack Reed (D-R.I.), sent a letter to the Secretary of the Department of Housing and Urban Development (HUD), calling to preserve homeownership affordability for American families as Wall Street firms expand their activity in the housing market.

According to the letter, the market conditions are favorable for large investors. More than 75 percent of investor home purchases were paid with cash. Senators Warren and Reed suggest that:

“These investment activities will make home ownership less available and affordable for American families and jeopardize HUD’s ability to meet its mission “to create strong, sustainable, inclusive communities and quality affordable homes for all.”

Families are increasingly feeling the impact of rising housing costs and a lack of inventory, even as our market begins to swift.

There were more homes for sale in 4 of the 5 weeks that ended in April, according to Realtor.com. Experts say that as inventory increases, thinking outside the box may help buyers stay competitive.

Love Letters.

Before cell phones, we sent them to our grade school crush as a paper plane. At other times, we folded the letter to make a paper football. After cell phones, love letters became text messages – making our expression of interest more efficient.

But how are love letters being used these days? Specifically, how are they being used in real estate, and at what point does it violate fair housing?

What are Real Estate Love Letters?

In the real estate industry, the term ‘love letter’ is used to describe a document that a potential buyer uses to convince a seller that they are the perfect match for them, generally indicating why they are best qualified. Details about the family, and their interest in why they deserve the home are included in the letter.

Love letters are usually accompanied by a written purchase offer.

Are Love Letters A Buyer’s Last Option?

The U.S. Real Estate Market Today.

Despite the Pandemic, there has been a great housing boom in the United States. Eight years of strong house price growth doesn’t seem to have slowed.

A number of cities have reported significant growth over the course of the last few years, as shared by Realtor.com.

A Housing Boom, but Not Enough Inventory.

There is a significant demand in today’s housing market. On average, sellers are receiving 4.8 offers for every home sold.

Prospective home buyers are frustrated, submitting as many as 34 offers to have a shot at buying a property. Some, are trying to cut through the noise by waiving their contingencies.

Private investors are trying to expand their portfolios by offering cash for parcels in various markets. Tech companies and fund management conglomerates are bulk-buying real estate assets to convert homes into rentals – leaving many buyers and their respective agents desperate to think outside the box.

How Are Buyers Forced to Think Outside the Box?

Some ways that buyers have stood competitive in today’s market include:

1. Waiving some or all contingencies.
2. Paying cash for homes.
3. Taking advantage of short sale or foreclosure opportunities.
4. Submitting a premium above appraised values.
5. Attaching a ‘Love Letter’ with offers.

Potential Problems That Can Arise with Homebuyer Love Letters.

There are a number of issues that can arise when using a love letter. While it is certainly legal for buyers to submit a letter of interest, many experts advise being extremely careful to avoid violating laws that protect against housing discrimination.

Buyer love letters are generally used to gain a competitive edge. The letter may disclose information about a buyer’s race, religion, or one’s family status, including marital status, age, and children.

In a 2020 article titled “Love Letters or Liability Letter?”, the National Association of Realtors (NAR) warned that the practice may make sellers and agents vulnerable to accusations of discrimination, as love letters often disclose personal details about a prospective buyer.

Last year, Oregon became the first state to ban ‘buyer love letters’ after Governor Kate Brwon signed House Bill 2550 in June. The law requires seller’s agents to reject direct communications from buyer to seller, outside the scope of a transaction offer. On Wednesday, a U.S. District Judge Marco Hernandez permanently blocked the ban, citing a violation of buyers’ First Amendment rights.

Fair Housing: Rights and Obligations

It is illegal to discriminate in the sale or rental of housing, including against individuals seeking a mortgage or housing assistance, or in other housing-related activities, according to the U.S. Department of Housing and Urban Development. Moreover, The Fair Housing Act protects people from discrimination against race, color, national origin, religion, sex (including gender, gender identity, sexual orientation, and sexual harassment), familial status, and disability.

As buyer love letters may be regarded as a form of marketing and advertising, it is also considered illegal for any marketing material to suggest a preference, limitation, or discriminate because of race, color, or any other protected class.

Some examples of advertising that may violate the Act include phrases such as “no children,” which indicates discrimination on the basis of family status, or “no wheelchairs,” which indicates disability discrimination.

A buyer or their respective agent may be accused of violating the law if a buyer’s love letter includes statements such as “We are a happy same-sex couple,” or “We are a peaceful family of four.” The phrases indicate sexual orientation and familial status, which are both protected in the Act.

How To Avoid Being Accused?

To avoid the possibility of being accused of housing discrimination, it is advisable to keep homebuyer love letters brief and to the point.

Love letters are not only used to identify buyers but are also used to market a property. It is important to be aware of what constitutes a violation of the law.

To further avoid accusations of discrimination, agents should also avoid submitting love letters that disclose information about a buyer’s race, religion, or one’s family status, including marital status, age, and children.

While it’s argued that a ban on love letters violates a buyer’s First Amendment rights, it is also argued that the letters are a form of marketing and advertising, and therefore, may still constitute an illegal or unethical practice.

In the end, agents, buyers, and sellers should be aware of the potential consequences of using love letters and should exercise caution when submitting them.