Real estate markets are constantly changing. If you’re thinking about buying or selling a home in the near future, it’s a good idea to have a pulse on what’s going on in the market. Real estate professionals often refer to markets as either a buyer’s market or a seller’s market, but what exactly do those terms mean and how can you tell which type of market you’re in? In this post, we’ll break down the definition of both types of markets, what causes each, and how to navigate them. But first, let’s start with a quick refresher on supply and demand.
A Word about Supply and Demand
Real estate markets, just like other markets, are dictated by the rules of supply and demand. In real estate, supply is defined as the number of homes available for sale and demand is defined as the number of buyers seeking to purchase homes.
The relationship between supply and demand is what determines the price of a home and the overall state of the housing market. When supply or demand fluctuates, so does the market.
What is a seller’s market?
In economics terms, a seller’s market is when the demand for homes exceeds the supply, or more simply put, when there are more people looking to purchase homes than there are homes available. When this happens, home sellers usually have the upperhand.
A lack of housing inventory (or supply) often leads to higher home prices and a more competitive landscape. Since demand is high, sellers will often have multiple buyers interested in their property and as a result, buyers will usually have less room for negotiation.
Homes in a seller’s market tend to sell quickly, at or above asking price, and with less pushback from buyers. As a buyer, you’ll need to act fast, bid higher, and do more to win over sellers. Don’t worry, we’ll cover this in more detail below.
So, what causes a seller’s market to begin with?
Several factors can lead to a seller’s market, including:
Population Growth
An increase in population often leads to a higher demand for housing. And if there’s not a lot of housing inventory already, demand can quickly exceed the existing supply causing the market to tip in favor of sellers.
Job Market Growth
Job market growth often fuels population growth. As new companies open up shop, more jobs are created, which in turn attracts more people to the area who will be on the hunt for housing.
Decreased Housing Starts
Housing starts refer to the number of homes that are starting to be built within a particular time period. The new construction of homes directly affects supply. Decreased housing starts means less housing inventory.
Characteristics of a Seller’s Market
If you’re still not sure which type of market you’re in, here are a few things to keep an eye on:
Low Average Days on Market (DOM)
Days on Market or DOM is the median number of days a real estate listing is active in your area. If houses in your neighborhood are selling in less than 10 days, that’s a strong indication you may be in a seller’s market.
Low Market Absorption Rate
Market absorption is defined as the number of months it would take to sell all the homes that are currently listed for sale if no other homes were listed. Typically, if the market absorption rate is between 0 and 5 months, then you’re likely experiencing a seller’s market.
Higher Offer Prices
More demand can often lead to bidding wars among buyers. A bidding war is when multiple buyers who are interested in a property place incrementally increasing bids in an attempt to win the home, and as a result, the overall sales price is driven up. When you see homes selling above list price, that’s often a sign of a seller’s market.
Rising Home Prices
Similarly, if you notice an overall upward trend in home prices in your area, you’re most likely experiencing a seller’s market, as overall demand for housing drives up home prices over time.
Tips for Buying in a Seller’s Market
In a hot real estate market, chances are you’ll be competing with multiple offers from other buyers. Luckily, there are a few ways you can put your best foot forward and stand out from the crowd.
Be Prepared
Before you start your home search, you should obtain a pre-approval letter from your bank. Being pre-approved means your lender has reviewed your income, credit, and other documentation in-depth. With pre-approval, you show the seller you mean business and that you’re a qualified buyer who’s ready to make a purchase.
Waive Contingencies
Contingencies are conditions that must be met for a deal to go through. The more contingencies, the higher the perceived risk you are to the seller. By waiving or limiting certain contingencies, you help reduce any friction in the sale.
Offer a Higher Earnest Money Deposit
An earnest money deposit is a deposit you make in good faith that you’re going to purchase the home. Offering a high earnest money deposit shows the seller you’re serious about purchasing their home and are willing to put some skin in the game.
Write a Personal Letter
Oftentimes, a personal touch can go a long way in setting yourself apart from other interested buyers. Writing a thoughtful note to the seller about who you are and why you love their home could be just what you need to win them over.
What is a buyer’s market?
A buyer’s market is when the supply of homes exceeds the demand. In other words, there are more homes available to be purchased than there are people looking to buy. Unlike a seller’s market, this type of market favors home buyers.
A buyer’s market generally results in lower home prices and less competition for buyers. As a general rule of thumb, if homes are sitting on the market for longer than six months, it’s a good indicator of a buyer’s market.
So, what causes a buyer’s market?
Some factors that can contribute to a buyer’s market, include:
Increased New Construction
The construction of new homes directly increases supply. But just because homes are being built, doesn’t mean there will be buyers who want to purchase them. If housing demand doesn’t meet the growing supply of homes, it can lead to an excess of supply.
Economic Factors
Certain economic factors, like a loss of jobs in the area or a large employer moving their office out of state, can lead to more people putting their homes on the market. This leads to an increase in housing inventory.
Demographic Shifts
For instance, if younger people in the area are holding off on homeownership, this shift shrinks the pool of buyers which in turn decreases demand for the existing supply of homes.
Characteristics of a Buyer’s Market
Keep an eye out for these characteristics if you suspect you’re in a buyer’s market:
Increased Price Cuts
If homes are on the market longer, sellers may be more likely to reduce the price over time to attract buyers. If you notice a high percentage of homes with recent price cuts, you’re likely trending towards a buyer’s market.
High Market Absorption Rate
As mentioned earlier, the market absorption rate is the number of months it will take to sell all the homes currently listed for sale assuming no other homes are listed. Generally, a market absorption rate greater than 6 months is an indicator of a buyer’s market.
Increased Real Estate Investing
An increase in purchasing among real estate investors often signals a buyer’s market. Investors are motivated to buy low and sell high, so when they suspect home prices are low, they start to buy up homes.
High Average Days on Market (DOM)
When there’s not enough demand for homes on the market, homes are much more likely to be on the market longer. As a general rule, when the average days on market is greater than five to seven months, you’re in a buyer’s market.
Tips for Selling in a Buyer’s Market
A market that favors buyers can often spell trouble for sellers since you’ll be competing against a larger supply of homes, but sellers don’t lose hope yet! Here are a few ways you can make your home more appealing to buyers:
Offer to Cover Closing Costs
Typically, both buyers and sellers are responsible for paying closing costs. For buyers, these include costs like attorney fees, inspection fees, and more. By offering to help pay a portion of the buyer’s closing costs in addition to your own, you may entice buyers who could use the extra cash. This is often a good alternative to reducing the sales price.
Pay for Repairs
Along the same lines as offering to cover closing costs, offering to pay for repairs is another way to help sweeten the deal for interested buyers. However, we caution you not to take on these repairs yourself. Instead, offer a credit to the buyers at closing to help them cover the cost of repairs or shave a little off your asking price.
Price Strategically
When you decide to list your home, it’s important to price your home competitively from the start. By doing so, it will be less likely that you need to reduce the price later on. It may feel like you’re losing out, but the alternative may be a home that sits on the market longer, which means you’ll be paying more for things like insurance, utilities, and possibly another mortgage.
Be Flexible
In a buyer’s market, the reality is that you may not get exactly what you were hoping for. Be open to negotiation and ready to compromise with interested buyers. Try to do everything you can to keep the sale alive and only walk away from deals that are obvious low-ball offers.
Even though real estate markets are at the mercy of supply and demand, there’s a lot that can be done to position yourself for success, whether you’re a buyer or a seller. Use this knowledge to keep a pulse on what’s going on in your local market, and if you’re looking for more personalized advice as a buyer or seller, give us a ring at 604-341-9937. Our lovely team of agents are always available to answer your call!