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Top housing markets with the most competitive homebuyers

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Tendayi Kapfidze, LendingTree Chief Economist, joins Yahoo Finance’s Alexis Christoforous to discuss where home buyers are most competitive and how to compete in the housing market.

Video Transcript

ALEXIS CHRISTOFOROUS: Well, with a lack of affordable homes on the market competition among home buyers in many parts of the country is heating up and resulting in some pretty fierce bidding wars. To find out where buyers are the most competitive, LendingTree ranked the 50 largest metro areas in the United States, and here to break down those findings for us is LendingTree's chief economist Tendayi Kapfidze. Tendayi, good to see you again. So, I'm going to get right to it. The number one place where you're seeing these bidding wars really heat up, not a big surprise to me, San Jose, California. Tell us why.

TENDAYI KAPFIDZE: Yeah, so it has a lot to do with the amount of supply in a city. And we know that in San Jose, it's a very wealthy area, so there's a lot of competition amongst home buyers because a lot of people have wealth and can afford homes. And one finding, for example, is that the average down payment in San Jose is the highest in the country, at just under 23%, versus a lot of other cities where the average down payment is actually below 20%.

And then we also see in San Jose that, for borrowers with credit scores that are really high, over 720, that's about 80% of people who are trying to buy a home in San Jose, versus a low of around 50% in one of the lowest cities like Denver. So, a lot of competition in San Jose because people are wealthy and they're trying to get into this hot housing market.

ALEXIS CHRISTOFOROUS: I have to say, I think San Diego and New York, if we're looking at what's up on the screen right now, a little bit lower on this list than I would have thought. Were there are some surprises for you in terms of where we're seeing the most competitive home buyers?

TENDAYI KAPFIDZE: I'll probably say the biggest surprise for me was Raleigh at number three, because typically where we find the most competitive cities tend to be areas with higher home prices and Raleigh is a relatively affordable midsize area. If we look at the cities where home buyers are least competitive, it's typically cities in the South that have lower home prices and typically more permissive zoning and building regulations, and so they have a lot of new homes coming onto the market. The more competitive areas are areas where there are restrictions on building. All the cities in the Northeast for example, that maybe don't have as much space to grow. So it was a surprise to see Raleigh being up there as a very competitive area for home buyers.

ALEXIS CHRISTOFOROUS: I know when it comes to buying a home, the biggest hurdle for most people is coming up with that chunk of money, right, that initial down payment. How much has the average amount of a down payment changed during the pandemic, and what is that average amount right now?

TENDAYI KAPFIDZE: Yeah, so we actually did another study last year where one of the things we were thinking about is are people using some of the money that they're saving, basically from not spending or not going out, and maybe some of this government stimulus money that has consumers with almost $2 trillion in excess saving- is some of that flowing through into the housing market? And we actually saw that down payments increased about three or four percentage points last year versus the prior year. And so we're seeing consumers, because of the hot housing market [INAUDIBLE] versus someone with a smaller down payment.

ALEXIS CHRISTOFOROUS: And I know that, I mean, if you're going to get into a bidding war with somebody, what are some of the things you should have on your side before you even jump into the fight so to speak? I would imagine having a really good credit score is one of them, and you'd want to be pre-approved. What are some things that people should be thinking about?

TENDAYI KAPFIDZE: Yeah, absolutely, getting pre-approved is essential. Because when a seller is looking at competing bids, what they're trying to assess, other than who's giving the best offer in terms of price, is what are the odds that somebody can get from contract signing to closing, right, so how do you get to approval, and finally getting those funds transferred to the seller. So, certainly, having a pre-approval is one of the main things that a seller would look at to make sure that somebody is coming in with a real capability to complete the transaction.

ALEXIS CHRISTOFOROUS: What about somebody's credit score? What's a credit score that you should have to even think about getting involved in a bidding war?

TENDAYI KAPFIDZE: You know the credit score-- doesn't necessarily see the credit score, where the credit score really comes into play is on your pre-approval, and the strength of how much money you can borrow, essentially. So that definitely comes into play on the mortgage pre-approval side, the seller doesn't necessarily get that information. But it's useful in terms of getting that pre-approval and so when you have that pre-approval, that's what makes you competitive. Now, there are many programs that are available for people with lower credit scores, so I wouldn't discourage somebody with a low credit score from attempting to purchase a house, but I would certainly say that you want to get your credit score in the best shape it can possibly be. If you think about a house is most people's largest purchase and the largest money [INAUDIBLE] that's when the credit score really can do the heavy lifting for you in terms of saving you money.

ALEXIS CHRISTOFOROUS: And look, I know that mortgage rates have been inching higher, but still in the scope of things they're still near historically low levels. I'm curious how many people really shop around for the best mortgage rate, I know that we've talked in the past you say you should at least look at three to five different places, but do most people take the time to do that?

TENDAYI KAPFIDZE: You know, unfortunately, only about half of people actually look at three or more mortgage lenders. There've been a couple of studies by the CFPB where they found that people really don't shop around as much as would be optimal. And it's really surprising because people who go to all kinds of lengths, comparing gas prices, comparing the price of coffee in their neighborhood, but really for the biggest transaction that they engage in, surprisingly, a lot of people still don't shop around. Which is kind of mind boggling for me because the savings can be so substantial.

ALEXIS CHRISTOFOROUS: Yeah, I say do the legwork. Check out where you can get the best coffee and the best mortgage. Tendayi Kapfidze, chief economist at LendingTree. Thanks for being with us.