Real Estate markets are constantly changing in residential homes. There are trends in the market that can help you understand the type of market you are living in or moving to.
It’s a buyers market if there are more sellers than buyers or you notice the prices of houses keep dropping. Another key indicator is if houses sit on the market for long periods of time.
How to Determine If It’s a Buyer or Seller’s Market
Trying to decide if it’s the right time to buy a house is a major decision. It’s one of the biggest investment decisions you will make in your lifetime. In most cases it’s transitioning from being a renter into being a home owner.
There are actually three types of markets but most people only talk about two. There’s the buyer’s market, seller’s market and a balanced market. Here is a chart of the differences:
| Market Type | Avg. Days on Market | List Price | Interest Rates |
| Buyer’s | 7 Months plus | Down | Up |
| Seller’s | 1-4 Months | Up | Usually Down |
| Balance | 5-7 Months | Up or Down | Neutral |
All markets are not the same at any given time. It may be a sellers market in one county and a buyer’s market a hundred miles down the road. Factors like water/beach front, growth in the area, cost of living and of course location, location, location create the market.
Another important factor is the increase in rent prices and availability of rentals. People can’t find rentals when moving to a new location because of work, retirement or other circumstances. Renters realize that they can buy cheaper than rent so home sales pick up. I’ve seen this cycle 3-4 times in my life time.
When it’s a buyers market the seller is more than willing to work with you on price, repairs and other requests like closing cost. The seller realizes the large competition in the market and doesn’t want to loose a perspective buyer.
Interpreting the Chart
The average days on the market is usually a guide of what type of market we are in. I say usually because as I’m typing this COVID-19 has most of the country on lock down and most people aren’t looking at houses right now.
The longer a house house sits on the market the lower the seller needs to set the price to sell it. In many cases the house was over priced to start with, that may be the reason it sat on the market so long. What we’re looking at is the average time on market for all houses in an area not just one house.
If houses are going under contract in 30 to 45 days then the price of houses are going to continue to go up. Buyers will be willing to pay full price and not make repair requests. This is definitely a sellers market and they know there’s another buyer right around the corner.
You can argue that the buying and selling of homes has nothing to do with mortgage lender interest rates but I think they do. It has been my experience if houses aren’t selling because inventory is low, the interest rate is lower to give incentives to people to buy houses. Banks make a lot of money off interest over 30 years even if it’s low. This of course stimulates the economy.
The opposite is true when it’s a buyers market. There is an abundance of home buyers so home prices are lower and demand for loans is higher so of course banks would increase interest rates for mortgages. Your buying at a lower price but your interest rate is higher.
In a balanced market, as a buyer, you can shop around for the best rate. Usually your rate will depend on your credit worthiness and your debt to income ratio. Mortgage lenders are a little more willing to work with you on a rate.
Absorption Rate Another Key Factor
The absorption rate is used to evaluate the rate at which available homes are sold in a specific market during a given time period. It is calculated by dividing the number of homes sold in the allotted time period by the total number of available homes. Investopedia.com has an great article explaining this.
An absorption rate above 20% signals a seller’s market and an absorption rate below 15% is an indicator of a buyer’s market.
Here’s an example: Suppose a large subdivision has 14 homes currently on the market to be sold. If 2 houses per month are sold in that subdivision the absorption rate is 14% (2 homes sold per month divided by 14 homes available for sale). This also indicates that the supply of homes will be exhausted in 7 months (14 homes divided by 2 homes sold in a month).
Look at The Inventory
Inventory in a market or area will tell you a lot about the type of market. People usually move in the spring or summer months due to kids and school schedules. More home owners will list their house in April or May because of this trend.
If your looking to purchase a house look at the current inventory, I mean really look at it. Check the condition of the homes for sale and how long they have been on the market. If your working with a Realtor they should be able to provide you with this information. Zillow and Realtor.com are also good sources of information.
A low inventory of average priced houses means that it’s a sellers market. This will usually be accompanied with quicker sales, as a buyer you don’t have time to procrastinate. I can’t tell you how a many times I got a call from a prospective buyer that is ready to put an offer on a house they saw a week earlier only to find out it’s already under contract.
This may not be true for more expensive house. If the average house in your market sells for $250,000 and your looking for a $500,000 house the inventory will be low because of the higher end house and the time on market will be longer because the buyer pool is smaller.
If there are plenty of houses to chose from and the prices are on the way down then it’s definitely a buyers market. This allows you to be more selective and able to negotiate more concessions.
Reasons to Hire a Real Estate Agent
Let me end this post with a few reasons to hire a real estate agent and a link to post on the first steps when buying a house:
- Local Realtors are familiar with the market that you are shopping in. They have all kinds of data on all the information mentioned above.
- They turn all this data into useful information. Knowing numbers and percentages is great but if you don’t know what it means what good is it.
- There is a pool of Realtors in the same company, sometime in several locations, that can help you as a buyer find that dream home.
- Of course the best part is the seller typically pays the buyer agent’s commission so you get their expertise, data, pool of agents, guidance through the process and someone else pays for it.