Market trends determine how real estate properties are bought and sold. When selling or buying a home or any other type of real estate/property, you are doing so in either a buyer’s or seller’s market. The two terms best describe whether or not it is a great time to buy or sell.
Understanding whether it is a buyer or seller marketplace is critical since it dictates the amount of competition you have, how you will price your home, your negotiating power, and much more!
Therefore, the importance of establishing if you are currently in a buyer’s or seller’s market cannot be overlooked if you are planning to perform any kind of real estate transaction.
What Is a Buyer’s Market?
A market characterized as having more property sellers and fewer buyers is referred to as a “buyer’s market.” In such a market, there are more people willing to sell real estate such as homes than there are people interested in buying such real estate. As a result, sellers are forced to lower their prices to be able to compete effectively.
The term “buyer’s market” comes from the fact that it is a relatively good time to buy real estate because the prices are lower than they would be otherwise.
In a buyer’s market, real estate buyers have a lot of choice. The high number of competing sellers makes it possible for buyers to get property at what would be considered below-market prices at other points. Buyers also enjoy other benefits such as aesthetic improvements, home warranties, and other extras since sellers are more receptive to buyer demands if taking a home off the market isn’t an option.
What Is a Seller’s Market?
A real estate market characterized by more buyers than sellers is referred to as a seller’s market. As the name suggests, a seller market favors sellers. Since there are many buyers competing for a few properties, the value of existing property goes up.
Individuals looking to buy property in a sellers market will have very little room for negotiating since sellers are spoilt for choice. In most cases, such individuals may be forced to raise their asking price to buy highly sought after property. Sellers of “hot” property can price their property as high as they like with little to no incentives to agree to buyer concessions/demands.
Differences: Seller’s Vs. Buyer’s Market
The biggest differences between a buyers and sellers market can be further understood by looking at several factors. If you are wondering how housing experts and real estate agents determine which market a house is in and what that means for home buyers and sellers, here’s what you should consider.
1. Population and job market growth
Buyer and seller markets can be differentiated simply by looking at the population and job market growth of an area.
A sharp increase in population usually results in a seller’s market since there is bound to be increasing demand for housing in the long-term. A seller’s market is almost guaranteed if the rise in population doesn’t coincide with the number of new properties being built.
The same is true for job market growth. A seller’s market can be distinguished from a buyer’s market by job market growth (increasing job opportunities), which, in turn, attract people to that area and increase demand for housing.
Real estate markets can also be distinguished by pricing. If the offer prices for real estate are increasing rapidly (and leading to bidding wars in some cases), this is a clear indication of a seller’s market.
Bidding wars are caused by many buyers declaring interest over few properties. The stiff competition to buy property in such a scenario usually drives real estate prices higher. If you see property selling higher than the listing price, this is a clear indication of a seller’s real estate market.
Bidding wars aside, rising home prices are also an indication of a seller’s market since the real estate market operates on the “law” of demand and supply.
3. Days on Market
The average time it takes for property to sell is also a good differentiator of the type of market in question.
While the time it takes to sell real estate depends on many factors, such as location, if homes are selling in approximately 10 days or less, this is a clear indication of a seller’s market.
However, if the opposite is true and homes are taking several months to get serious offers, then it would be an indication of a buyer’s market.
4. New Construction
You can also check the number of new properties being built at a given time to differentiate between a buyer’s/seller’s market.
An increasing number of new constructions indicates a seller’s market, while a shrinking number of new constructions or no new constructions at all indicate a buyer’s market.
5. Demographic Shifts
To distinguish between a seller/buyer real estate market accurately, you must consider multiple factors.
While population growth usually results in a seller’s market, this isn’t always the case. For instance, if the population is growing, but the majority of the population (i.e. young people) aren’t keen on home ownership, the demand for housing won’t be as great.
In such an instance, increasing population wouldn’t necessarily translate to a seller’s market.
6. Economic factors
Economic factors such as job losses can create a buyer’s market. If a large employer fires thousands of employees, a buyer’s market can be created if those employees decide to sell their homes. Unemployment, therefore, is a big determining factor when it comes to real estate prices.
Other economic factors like recessions or economic booms can also dictate if a market is a buyer/seller market. Recessions usually result in a buyer’s market since many people are struggling financially and there is less demand for housing. As a result, many home/property owners are willing to sell at a lower price resulting in an oversupply of cheap property in the market.
On the other hand, people have more money to spend during economic booms, which drives prices of real estate higher. This gives property sellers an advantage and allows them to sell their homes for more.
7. Property Inventory
Seller’s markets vs. buyer’s markets can be differentiated based on the number of properties listed for sale in the market. The higher the property inventory, the higher the likelihood of being in a buyer’s market. If fewer homes are listed, you are most likely in a seller’s market.
To determine the real estate market in question accurately based on property inventory, divide the number of properties (i.e. listed homes) by the number of homes sold in the previous month. A result that is below 5 is a strong indication of a seller’s market, while a result above 7 indicates a buyer’s market. Anything between 5 and 7 is neutral.