The housing market is inching toward recovery with six months of pending home sales up after months of declines, says the National Association of REALTORS®. Yet home prices are continuing to drop, pressured by a recession-led increase in distressed homes and foreclosures.
It’s a mixed message. As a home buyer or seller, you may feel a little confused. Is it time to buy or sell, and does the market favor you or not?
What is a buyer’s market/seller’s market?
Buyers and sellers markets are both broad terms that refer to the general marketplace.
A buyer’s market simply favors the buyer with conditions that include high inventories of homes for sale, frequent concessions by sellers and builders, falling market prices, and more favorable terms. Typically, when inventories are above six months on hand, a market is said to favor buyers, as they can negotiate lower prices.
A seller’s market favors the seller with rising prices, quick inventory absorption, and buyers paying close to or above asking prices with little or no requests for discounts or better terms. When housing inventories fall below six months on hand, it’s said to be a seller’s market.
It takes 30 to 90 days to close escrow, which makes six months of inventory on hand a good benchmark. Theoretically, if no new inventory is added, all homes in the market would sell within six months leaving zero homes for sale.
Why is it important to know if you’re in a buyer’s or seller’s market?
Real estate professionals track housing inventories by “days on market” or DOM. This clock starts ticking when the listing becomes available to all members of the MLS on the open market and to the public through MLS websites, advertising, and signs in the yard. Through DOMs, real estate professionals can track which locations, price ranges of homes, and even which types of homes (detached, attached, high-rise) are selling the fastest and slowest.
Within the same market, conditions can change dramatically. Price, location and condition can render certain neighborhoods bullet-proof from falling prices. Artificially low interest rates and tax credits have created a blistering market in the conforming price ranges even while luxury homes sit dormant within the same area.
A buyer’s market doesn’t mean that the seller has no advantages, or that the buyer has no advantages in a seller’s market. Both parties can “win,” but it is important to know the market to help you determine your best strategy.
Your real estate professional knows the market and whether or not it’s skewing in favor or buyers or sellers, and in which neighborhoods, price ranges, condition and types of homes.
Strategies for buyers markets
If you know that there are 12 months of inventory available in the neighborhood and price range where you want to buy, your strategy can be to offer to buy at a price the seller will accept without quarrel. That price is not so low the seller is insulted, but low enough to demonstrate that you understand the market.
If you’re a seller in the same market, you might try competing on condition rather than price. Put your home in white-glove condition with attractive improvements and staging to warrant a higher price from buyers. Offer incentives, such as the washer/dryer or refrigerator to the buyer.
Strategies for sellers markets
A buyer in a seller’s market has to be prepared to buy quickly with a strong lender preapproval and no contingencies such as having a home to sell. Your real estate professional can show you how closely homes are selling to asking price and if the market is turning to multiple offers above asking price.
A seller can ask more for their home in a seller’s market, but, once again, the home in the best condition will command the highest price. Ironically, a seller’s market is the best time to sell a home in less-than-perfect condition, because the rising tide of the market will lift all boats, including a home in need of repair or updates.
Soft markets don’t last forever
Sometimes a buyers' market can be created that lasts for a long time. The exit of one or more major employers from a community, a natural disaster such as a flood or earthquake, or some other catastrophic event can affect home values in an area for years.
The one certainty that can always be counted upon is that one side of the market will never stay on top forever. In fact, it can turn on a dime. The same area that remains depressed for a period of time can make a strong comeback.
All it takes is home buyers willing to invest.