Homebuyers

Buyer's Markets vs. Seller's Markets: Understanding the Key Differences

If you're hoping to purchase a home, it’s important to understand if you’re in a buyer’s market or a seller’s market. Home shoppers often have the upper hand in a buyer’s market, while homeowners have an edge in a seller’s market.

Here's a crash course in the differences between a buyer's market and a seller's market.

What Is a Buyer's Market?

A buyer's market favors home shoppers. They often have more choices and additional bargaining power. How do you know if you're in a buyer's market? Look for these signs:

• There are lots of homes for sale.
• Home sales are slow.
• Homes are lingering on the market for longer periods.
• Home prices are flat or falling.

The first advantage of a buyer's market is that there's generally a larger selection of available homes. In addition, buyers may have more time to contemplate offers because homes aren't being snatched up as quickly as they would be in a seller's market.

What Is a Seller's Market?

A seller's market is often defined by a low supply of homes for sale. That can force buyers to compete to get offers accepted. How do you know if you're in a seller's market? Here are the signs:

• The supply of homes for sale is tight.
• Home prices are rising.
• Homes are selling quickly.
• Homes are receiving multiple offers.

There is generally stiff competition in a seller’s market. That may cause buyers to do everything possible to sweeten their offers. This can include making offers above the asking price and waiving contingencies.

Key Indicators of Housing Market Conditions

The housing market will not remain a buyer’s or a seller’s market forever. Factors like a change in unemployment, mortgage rates, or the amount of new construction can push the market in a new direction.

For everyday people looking for tools and resources to analyze local real estate markets, the National Association of Realtors (NAR) provides monthly reports on home sale trends. You can also work with a local real estate agent to get the temperature of the market where you live. In the meantime, here's a look at some clues that will help you detect whether you are in a buyer's market or a seller's market.

Housing Inventory Levels

The number of homes for sale is one of the biggest indicators of market positioning. A seller's market occurs when the housing demand exceeds the supply. When there are more potential buyers than available homes, the market will favor sellers. When inventory is high, the excess of available homes creates a buyer's market. Buyers may not feel pressured to participate in as many bidding wars when they have more options.

Days on Market (DOM)

Days on market refers to the typical number of days homes sit on the market before they are sold. When DOM is declining, inventory is often tightening. If DOM is creeping up, this is an indication that competition for homes is slowing down.

Pricing Trends

Rising home prices often signal the shift to a seller's market. Higher prices can influence buyer behavior in one of two ways. That can cause some buyers to try to quickly get into homes to buy before "peak" pricing. However, it can also price some buyers out of the market and cause others to wait until prices drop.  Meanwhile, declining prices often signal that buyer demand has cooled.

Strategies for Buyers in a Buyer's Market

In some cases, a buyer's market presents an opportunity to find the right home for you. When prices and competition are lower, buyers can use these tips to find a home and potentially save money:

• Have a mortgage preapproval letter before you begin shopping.
• Don’t rush into making an offer until you find the right home.
• See as many properties in your price range as possible.
• Analyze comparable homes. Also known as comps, these homes are similar in size and features and are used to determine fair market value.
• Know the DOM of any home you’re interested in. This helps you to determine whether to ask for a lower price if a home has been sitting on the market for a while.
• Consider asking for concessions from the seller to cover repairs or closing costs.
• Think about making an offer below the asking price.

Strategies for Sellers in a Seller's Market

Sellers still need to compete against other sellers to attract buyers, even in a seller's market. Here are some tips:

• Present a clean and organized home. Consider using staging services.
• Price your home fairly.
• Consider pricing your home lower to inspire multiple offers in a "bidding war."
• Verify that potential buyers are preapproved for a mortgage. If your home's asking price is over FHA loan limits, you may need to focus on borrowers with Conventional loans or FHA buyers with large down payments.

What happens if you receive multiple offers? In the case of a bidding war, the highest offer isn't necessarily the best offer. Consider offers carefully by looking at each buyer's financial strength.

A buyer with a high credit score and verified funding may help you to make a swift sale that reduces the risks of having to relist your home. Remember that a buyer may be unable to obtain funds just because they have made a higher offer.

Avoiding contingencies is another way to speed up a potential closing. Mortgage contingencies and home sale contingencies can keep your home on the market longer by prolonging the closing process. They may also allow a buyer to back out without losing the earnest money deposit if certain conditions aren't met.

Strategies for Buyers in a Seller's Market

While it doesn't always seem like an enviable spot to be in, buying a home in a seller's market is still possible. The important things to remember are that competition is high, time is of the essence, and knowledge is power. Keep these tips in mind:

• The first item in any homebuying FAQ is to get initial mortgage approval ahead of time.
• Make an offer quickly when you find a viable home.
• Come to the table with the largest down payment possible to stand out. This shows a seller that you're a serious buyer.
• When allowable, make backup offers when homes are contingent or pending.

Strategies for Sellers in a Buyer's Market

Selling a home during a market lull is about showing it in the right light. Here are some tips to make your home stand out when there are plenty of other options available:

• Prepare for picky buyers who will have plenty of comments to make about everything from the state of your home to the listing price.
• Take care of repairs.
• Consider making minor improvements with strong returns on investment (ROI).
• Clear away photos and other personal items from your home to allow potential buyers to visualize themselves in the home.
• Landscape to boost curb appeal.
• Market your home using top-notch professional photos. Consider hiring a professional stager to make your home stand out for photos and in-person tours.

If the goal is to sell quickly, consider pricing it a little lower.

Market Transition: What to Expect

As a market shifts in a new direction, there may be a period of time where the market is considered balanced.

A balanced market is a transitionary period when both buyers and sellers are on equal footing. This means that both may be able to get the deals they want without one group having an advantage over the other. Balanced markets are characterized by steady pricing, days on market, and inventory levels. When shifting away from a balanced market toward a seller's market, pricing begins to increase just as inventory begins to taper off. When moving to a buyer's market, buyers become less likely to make offers on homes they may believe are overpriced.

FAQs

What causes a market to shift from a buyer's market to a seller's market?

Fewer homes going up for sale is the leading cause of transitioning from a buyer's market to a seller's market. Reasons for lower inventory include higher mortgage rates that keep potential sellers in their homes, slow construction, and demographic shifts.

Can local markets differ from national trends?

Yes! This is the difference between "hot" markets and "cold" markets. Generally, homes in desirable metropolitan areas will be part of a seller's market when demand dips in other parts of the country. While local inventory and pricing are still affected by overall national trends, in-demand markets are often more insulated against dips.