When talking about how a real estate market is doing, the terms buyer’s market and seller’s market get tossed around a lot.
What do these terms mean? Why are they important?
Referring to a real estate market as a buyer’s market, a seller’s market, or a balanced market is a way of taking the temperature of a real estate market. Whether you are planning on buying a home or selling a home, the state of the local real estate market will affect you in some way.
All real estate is local. A real estate market is a buyer’s market, a seller’s market, or a balanced market depending upon a variety of factors including location, property type, and price point.
Here’s a look at the difference between buyer’s markets, seller’s markets, and balanced markets, and how they affect home buyers and home sellers.
A balanced market is considered to be when there is a 5.5 months' supply of housing inventory (homes available for sale) in a real estate market. A balanced market is equally favorable to both home buyers and home sellers.
A buyer’s market is considered to be when there is more than a 5.5 months’ supply of houses available for sale. In other words, in a buyer’s market, home buyers have a greater variety of houses to choose from as they are making their purchasing decisions.
When home buyers have a larger variety of houses to choose from, home sellers are put in the position of needing to come up with strategies to have their house stand out to home buyers. The stronger a buyer’s market is (the more houses that a buyer has to choose from), the harder home sellers have to fight in order to position their house to be the one that buyers choose to buy.
Thus, in a buyer's market, home buyers have more leverage and are in a stronger negotiating position.
Home sellers do best in a buyer’s market when they realize that their house is competing against many others to get a buyer’s attention. Competitively pricing their home for sale given what has recently sold in their area is especially important for home sellers looking to best position their house for sale in a buyer’s market.
Going over recent sales of comparable homes with their real estate agent is of paramount importance as sellers are coming up with a pricing strategy for their homes.
A seller’s market is considered to be when there is less than a 5.5 months’ supply of homes for sale in a real estate market. In other words, in a seller’s market, there are more home buyers looking for houses to buy than there are houses for sale. As home buyers compete for a scarcity of homes for sale, multiple offer situations and offers over asking price are not uncommon.
Home sellers generally have more wiggle room on pricing their house for sale in a seller’s market. However, going too crazy with home pricing in a seller’s market is not the best idea. If a home buyer will be getting a mortgage, the house will need to appraise for the purchase price. If the house does not appraise, this can cause much wailing and gnashing of teeth and may potentially cause a deal to fail.
When a seller works with their real estate agent to come up with a pricing strategy, their motivation and timeline for selling should also be taken into account along with market conditions.
When buying in a seller’s market, preparation and responsiveness are key.
While getting prequalified before searching for homes is always important, this step takes on extra significance when buyers are competing in a seller’s market. In a hot market, houses go quickly and the time for making an offer may be short. Before considering an offer, sellers want reassurance that a buyer can purchase their home. Being able to present a prequalification letter with an offer can mean the difference between a buyer having their offer considered – or not.
A real estate market may be a buyer’s market and a seller’s market at the same time. That’s because the amount of buyer activity varies by price range.
For instance, in a real estate market where there are more home buyers looking to purchase homes in the $200,000-$249,999 range than there are homes for sale, that price range would be considered a seller’s market.
Similarly, if there many more homes available for sale in a price point than there are buyers (example $1,000,000 or more), that price point would be considered a buyer’s market.
Buying and selling homes does not happen in a vacuum. Home buyers and home sellers who work with their real estate agent to understand the state of the market at the outset of their real estate journey are better equipped to make pragmatic decisions based upon their local market conditions.