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The dull days of summer may be over sooner than expected in the nation's housing market.
The supply of homes for sale, which had been increasing earlier this year, could turn lower again soon, and that will likely mean the return of bidding wars.
Such battles had slowed dramatically this past spring, thanks to more listings and more cash-strapped buyers unwilling to pay top dollar. Nationally, just 12% of offers written by Redfin, a real estate brokerage, faced a bidding war in June, down from 52% a year earlier. The supply of homes for sale, however, which had been up over 6% annually in January, is now up by just 2.8%, according to realtor.com. Housing demand is also rising, as mortgage rates sink.
"With low mortgage interest rates luring more homebuyers off the sidelines as supply dwindles, we're likely to see competition pick back up, especially for the most affordable homes and neighborhoods, where inventory is limited and buyers are most rate-sensitive," said Redfin's chief economist, Daryl Fairweather. "At Redfin, we've been seeing increases in the numbers of homebuyers starting their searches and going on home tours following the latest mortgage rate drops."
Fairweather predicts that housing inventory will flatline over the next few months and then go negative by October. In some markets, especially those where prices are more moderate, supply is now significantly lower than it was a year ago. Bidding wars are already more prevalent in cities like Oklahoma City; Richmond, Virginia; Memphis, Tennessee; Buffalo, New York; and Atlanta, where demand far outweighs the number of available listings.
Real estate agent Harrison Beacher, of Keller Williams Capital Properties, works in some of the more up-and-coming neighborhoods of Washington, D.C. Housing inventory in the district was up more than 7% in May compared with a year ago, but that's down from a 24% supply gain in January, according to the Greater Capital Area Association of Realtors. Beacher is prepping his clients, three-quarters of whom are first-time buyers, for bidding wars.
"The first thing they have to do is look in a mirror and not out a window. They have to understand their comfortable max," said Beacher. "We say 'what is your max capacity?' Be prepared mentally to go up to that max capacity. If it's under, that's gravy."
Working with a lender first is, of course, paramount, so buyers understand what exactly they can both borrow and afford. Then they have to decide how much they are willing to risk in terms of waving any inspections or contingencies on a house.
"That can be scary to a lot of folks," added Beacher.
Once the war is underway, buyers have to come up with different strategies that go beyond just top price. Sellers can be sticky and emotional. Most want to be able to picture their buyers in the home, and that picture has to be warm and fuzzy. Beacher said he has seen buyers research the sellers on LinkedIn to try to find some kind of connection.
Bidders often write letters to the sellers, but Beacher warns, it cannot just be about how much they love the house.
"I always encourage the clients to work on their narrative. That has helped us win two bidding wars this year," he said. "Somebody overcoming something without being too cheesy. What it means to you to be here. Projecting the life you will live in the house and continuing what the owners have started. Pay attention to detail, things that people did in the house, like 'We love your pine, herringbone floor pattern.'"
He strongly advises against pictures, as those can cause fair housing issues if they depict race or gender. Losing bidders can sue the seller on those grounds. It can also be risky to offer too much, because an appraiser might not value the home as high, and the mortgage financing could fall through.
Taylor Frank and his wife searched for over a year and then recently put an offer in on a northern Virginia home, only to be met with six other offers. They had researched the market thoroughly and offered even more than they thought it was worth.
"We knew we were going to have to come in pretty hot, and that's what we did," said Frank. "If the appraisal had not come back at a price similar to what we ended up paying for it, we were going to have to pay that cash out of pocket, which we didn't really want to do."
They also waved any contingencies.
"It just kind of all came to a head really quickly, which was quite stressful and then also the lack of information. You're not sitting across from somebody negotiating in real time. One person is talking to another person, who is talking to your person, who is talking to a realtor, and it is just all over the place," he added.
Real estate agents also have to step up their game in a tighter market. That means connecting with other agents to know the terrain before the war begins.
"We often have at least a conversational relationship with the other agent," said Beacher. "We have more rapport to say, 'how many have been in the house?' 'How many did an inspection?' 'How many are putting in offers?'"
Frank and his wife also wrote a letter, describing how they wanted to start a family. It turned out, the sellers had started their family in the house, and Frank said he thinks that resonated. They expect to close on the home next week.
— CNBC real estate producer Lisa Rizzolo contributed to this report.