That's an interesting question. Should you overbid on a house? Probably not. Does it matter if you do? I think it depends on your reason behind it. First off sometimes people list homes lower than they know it's worth to get a bidding war. So prices are not normally that low. Second the price of homes also change especially in the spring when you see the prices escalating which will carry through the rest of the year.
The house we bought we went 30% above list price to win. We paid $2500 more with an escalation clause than the next highest bidder. So in theory we "overpaid" but only by $2500 because there was someone else interested in buying the house for $2500 less than we paid.
Why did we do it? We had a reasonable budget for buying a home. But the market in 2017 was very hot and we had lost out on a few homes that we had been lukewarm about. Finally when we saw this home we decided we were all in. Mostly because the location was prime and exactly what we wanted. It was the smallest house we had seen and needed the most work. But the location was ideal and prime compared to the other homes we had bid on so we wanted it.
Because of our budget and our observation from looking for houses for almost a year, we noticed that most homes were going in bidding wars. Most people were going 20-30% or more over list price. So we decided the smartest thing to do was not go to our limit but step down our "needs" in a home and bid on lower homes we were more likely to win. This was probably the biggest factor in getting a home. Managing our Needs versus Wants. I find a lot of people have somewhat unrealistic expectations for what they can afford. The dream house is only affordable the further out they move often times. Rather than living smaller they move farther.
We did the opposite. We scaled back our expectation of home size and quality and bought something much smaller and needing work as opposed to moving further. I'm not sure it was the right decision for everyone but it was for us. A lot of that stemmed from we had never lived bigger so we just didn't jump into a huge home.
Even now the 2040 sq ft home feels tight and small. But it's the biggest place we've ever had with kids or ever and we have an attached garage to boot. So while it's not a dream home it's pretty lovely and nicer than what we had or grew up with. I had a carport and DH had detached garages. Our homes growing up were 1970s tract home 1200 sq ft 3bd/2ba ranch homes pretty identical. This is substantially nicer than what we both had.
The cost of buying even overbidding was a wash. In 2017 the going rent on our place was around $3500-4000/month that's what the neighbors got for their rental. It's now closer to $4500/month. Our PITI with a fixed rate is $4800/month but that's likely to go up with property taxes going up. Currently we are at $4100/month but it's an ARM mortgage and lower PT. Why was it a wash? Well our principal in 2017 was $1587 and interest/property taxes escrow was $2998. So it came out to about the same as renting our place if not a little cheaper. So overbidding on our place was still the better deal than renting.
The calculus now? $1400/month interest plus $1000 Property Taxes = $2400/month to rent our place. Our principal payment is $1717/month enforced savings. Also our location is the most resistant to price decreases because of proximity to things and we bought the smallest home in the nicer neighborhood. All these things were factored into our decision.
I had no idea we would be "renting" our house for what we used to pay in rent $2400/month in 2015-2017. I guess my point is that housing is a hedge against inflation. It's a great way to fix your costs if you can see yourself staying put. It's if you overbuy or aren't sure if you are staying that it becomes a huge risk.