Chasing a Rising Market
Many stock market observers believe that one of the key ingredients fueling recent record highs is something called “short covering” (note: I’m one of them).
Whereas investors who “buy long” make money when stocks go up, short sellers profit when stocks fall (technically, they borrow stock to sell when they believe it’s overpriced, then replace it once it’s dropped to close out their trade).
Call it “sell high, buy low.”
But what happens when short sellers are wrong, and stocks instead rise?
In fact, rise and rise and rise?
To staunch their losses, they need to buy stocks on the open market at ever-higher prices.
In other words, in a rising market like today’s, short sellers actually fuel demand for stocks — an especially combustible phenomenon known as a “short squeeze” (that’s in addition to all the momentum-types who typically plow into the market after record highs).
Bull Market Rocket Fuel
Could something similar be happening in the housing market now?
Aside from Wall Street infamously bundling “designed-to-fail” securities and then betting on them collapsing (a manuever perfected by Goldman Sachs, amongst others), I’m not aware of any direct way to “short” the housing market (besides perhaps shorting the stock of publicly-traded home builders).
So, there’s no potential for a “housing market short squeeze.”
But that doesn’t mean the housing market isn’t benefiting from turbo-charged demand from a certain type of Buyer at the moment.
Who might that be?
My candidate: runners-up Buyers in multiple offers.
Trying Harder Next Time?
Each time a home sells in multiple offers — and hundreds have sold in the Twin Cities that way this Spring already — there is one winner and anywhere from one to five (or more) runners-up.*
What do all those runners-up Buyers do the next time they see a home they want to buy?
If they’re rational — and that much closer to an expiring lease, new job start date, etc. — they bid more aggressively.
Multiply that behavior across hundreds of new listings (and dozens of housing markets nationally), and it’s easy to see how a Seller’s market gains even more momentum.
*I prefer “runner-up” to “loser” (sort of like the Academy awards’ ” . . . and the Oscar goes to . . .“) because if the home sold above the Buyer’s comfort point . . . they didn’t really “lose” it.
As I tell my Buyer clients in such situations, “the right price to offer is what you’re OK with if you get the home – and what you’re OK with if you don’t.”