The Definition of a Buyer’s Market
In real estate sales, there are essentially three types of markets. There is a buyer’s market, a seller’s market, and a balanced market. The differences between buyers’ and sellers’ markets are like night and day.
Real Estate markets go through cycles. The real estate market never stays the same as outside forces change it in one direction or another.
When there is a buyer’s market in place, more homes are available for sale than people looking to buy them. It’s good news for those who are looking to buy a home, as more options are available.
In buyer’s markets, the supply of homes exceeds the demand. A large influx of homes entering the market or a substantial decrease in interested home purchasers could create a buyer’s market.
Both situations could occur at the same time.
In a buyer’s market, house prices decrease and stay on the market longer. More sellers are competing with one another, which forces the market to adjust.
Home sellers become more willing to negotiate to prevent losing out to the competition.
One of the more common questions real estate agents field is whether it is a buyer’s or seller’s market. All real estate is local, so it is an excellent question.
Let’s look at everything buyers, and sellers need to know about buyers’ markets.
What Causes A Buyer’s Market?
Numerous external forces can create a buyer’s market. Some of the most common situations that swing a seller’s or balanced market into a buyer’s market include the following:
Dramatic Increase in Mortgage Interest Rates
When interest rates rise, home buyers can no longer afford the homes they were considering. First-time home buyers could have a specific budget on what they can afford for a monthly mortgage payment.
When interest rates go up, they can no longer afford that same property. Sometimes if rates shoot upward, they will no longer qualify to purchase. Rising interest rates reduce a buyer’s purchasing power.
Inflation Skyrockets
When inflation ramps up, the cost of everything goes up, including housing. When home prices become too high, fewer buyers can purchase. They get priced out of the market.
Further, when the cost of everything else rises, less money goes towards affording home ownership. When the price of goods and services increases dramatically, less money can be allocated toward owning a home.
The Economy Becomes Weak
A lagging economy can affect a buyer’s decision to purchase many things, including housing. In times of economic weakness, people tend not to spend their money but batten down the hatches and become conservative.
An economic recession can force existing homeowners to sell their properties if things become terrible. Some will no longer be able to afford their mortgage while also shrinking the buyer pool for homes.
Declines in The Local Job Market
When the job market is weak and people are being let go, it can impact both current homeowners and potential buyers. If things get bad enough, owners will be forced to sell and move out of the area.
When large companies are hiring and buyers are relocating into an area, the real estate market is more robust. Often when an influx of relocation buyers enters an area, it benefits home sellers.
If there is a departure out of an area, the exact opposite occurs.
Over Building of New Construction
When too many new homes are built, it can affect the entire housing market. The number one driver of any housing market is supply and demand. When the supply of homes is too high without the demand to keep up, it can change quickly to a buyer’s market.
When there is not enough new construction, the exact opposite can occur. One of the common factors of a seller’s market is not enough new homes being built.
Some or All of The Above Can Cause Buyer’s Markets
It doesn’t have to be just one factor that causes buyer’s markets. It can be more than one thing mentioned that finally shifts a market favoring sellers back to buyers.
What Are The Signs of Buyer’s Markets?
Many things can indicate the local market has shifted to favor home buyers. Let’s review some of the most common characteristics of a buyer’s market. Sometimes when a shift occurs, it can be gradual, and other times it will end abruptly.
Less Bidding Wars
One of the things you will notice right away when there is a change from a seller’s market to a buyer’s market is far fewer bidding wars. It will be the first sign of a shift in the market ahead. When a bidding war does exist, there will also be fewer bidders. Instead of having ten offers on a home, you might have two or three.
There will also be fewer escalation clauses written into offers because there won’t be numerous buyers to compete against.
There Will Be a Dramatic Increase in Price Reductions
One of the clear indicators of a market losing steam is price drops. In a seller’s market, you rarely ever see a price reduction. When a market favors buyers, sellers are forced to have different expectations.
Buyers will start to recognize what is happening around them. They will realize that comparable homes sold were based on a different type of market. Savvy home sellers will realize a change is afoot and will reduce their home prices to compensate.
Unfortunately, there will be another set of sellers who don’t realize right away that the market has shifted. They will have priced their homes with a seller’s market mindset.
Eventually, they too will end up reducing. Sometimes it’s too late, and they chase the market down.
Inventory of Homes For Sale Goes Up
Demand does not meet supply in a buyer’s market. When it persists, the number of homes for sale continues to rise. Rising home inventory levels are a clear indicator the market has started to shift.
When there is low inventory, this means that the sellers are in control of the market. When there is high inventory, this means that the buyers are in control of the market.
A market with consistent inventory levels could be classified as being a balanced market.
When more buyers than sellers characterize the market, you will often see an increase in for-sale signs. Many buyers will notice that when they look at popular real estate sites, they have more to choose from.
The Days on Market For Homes Goes Up
The days on the market and cumulative days on the market (CDOM) will rise when a market favors buyers. With demand not keeping up with supply, more homes sit without offers.
The days on the market will also go up when going from a hot seller’s market to one that is more balanced. In extreme seller’s markets, many homes will be on the market for a week or less.
That is certainly not the case in a buyer’s or balanced market. The absorption rate will decrease substantially with buyers’ markets.
The Number of Homes Sold Will Drop
It probably won’t come as a surprise that the volume of real estate transactions will be lower. In a sellers’ market, there are typically more homes sold. Not always, but most of the time.
List Price to Sale Price Ratios Will Change Substantially
In an extreme seller’s market, it is not unusual for the list price to sale price ratio to be over 100 hundred percent. With many homes having bidding wars, buyers will bid far more than a home’s asking price.
When there is a shift to a buyer’s market that comes to a screeching halt. Many homes will start selling under the list price. The list price to sale price will look nothing like it did in a seller’s market.
As more homes sit unsold, the list price to sale price can go down even more. The median price of houses will also be lower.
Real Estate Contracts Will Have More Contingencies
One of the noticeable characteristics of a seller’s market is a lack of typical contingencies in a real estate contract. With bidding wars being the norm, buyers do everything possible to beat the competition.
One tactic is removing standard contingencies such as the home inspection or mortgage contingency. In seller’s markets, buyers do everything they can to make their offers irresistible to sellers.
That all changes when the market shifts. In a buyer’s market, there will be standard contingencies for the inspections and financing. Some buyers may even try to get a home sale contingency accepted.
Other things in the offer, such as the agreed-upon closing date, will become more negotiable. Even the amount of the earnest money becomes more navigable.
Fewer Cash Buyers
In a seller’s market, there are more cash buyers because it is a popular method of making your offer stand out in a bidding war. Sellers love cash offers because they don’t need to worry about an appraisal gap, an appraisal contingency, or the buyer not being able to get a mortgage commitment.
With nary a bidding war in a buyer’s market, the need to pay cash for a home is removed from the equation.
More Homes Back on The Market After Home Inspections
In a seller’s market, very few homes come back to the market. When a property goes under contract, it typically stays that way. Even homes marked as contingent rarely return to the market.
There are fewer inspections, and even when one is conducted, the buyer has little leverage. There are often backup offers or buyers dying for the home to come back on the market. Buyers must forgo negotiations for seller concessions, repairs, or price drops.
That all changes when shifting to a buyer’s market. The buyer will again hold all the cards. Sellers will be forced to accept inspection negotiations. Sometimes a meeting of the minds won’t be reached. It will lead to more back-on-market properties.
More Expired and Withdrawn Real Estate Listings
When real estate markets favor buyers, a natural effect is more home sale failure. There will be sellers who aren’t realistic. There will also be real estate agents who give awful advice to their clients about where the property should be priced.
The result will be more sellers seeing their homes expire in the MLS. Some will withdraw their house from the market when they realize their property won’t sell at the desired price.
More Open Houses
You will start to see more open house signs going up. Real Estate agents will go back to letting anyone with a pulse into their client’s homes.
Why? Two reasons. They will want to prospect for business and will need to show the seller they are “doing something” for their money.
Instead of explaining open houses don’t work to sell a home, many average agents will just go along with their seller’s wishes. Sellers shouldn’t be surprised when something goes missing from their home. Open houses are magnets for crime.
Prospective Buyers Get a Better Deal in a Buyer’s Market
In a seller’s market, the number of homes available will be far less. The number of buyers will also exceed the housing supply. On the other hand, buyers’ markets will feature plenty of homes. With a surplus of homes available, home buyers will have the upper hand.
There will be less competition and lower prices, which add up to the best time to buy. Your negotiating power will be much better than in a sellers’ or neutral market.
When fewer homes are in a hot market, buyers often make more mistakes. Without the added pressure to find a home, it will be an ideal time to make the best decisions. The likelihood of getting a great deal goes up exponentially.
You’re likely to purchase under the listing price with plenty of available homes. Sometimes it will be significantly less.
Tips For Purchasing in a Buyer’s Market
Be More Choosy With Your Housing Choice
One of the more significant differences when looking at homes in a buyer’s market will be less pressure to make an immediate decision.
Take your time. Do the required due diligence necessary to make a wise purchase decision. Rushing to buy a home in a seller’s market quickly leads to mistakes.
Look Over The Neighborhood and Surroundings More Carefully
Don’t just look over the house, but the neighborhood and outlying area. Is there anything nearby that could negatively impact the value?
Scrutinize The Competitive Market Analysis
In a changing real estate market, a comparative market analysis will become more crucial to look over carefully.
It is essential to do your homework when it comes to analyzing comparable sales. Make sure your buyer’s agent does a good job presenting the most recent comps.
Don’t rely on old data that could reflect a different market. Ask your agent to print out data sheets from the multiple listing service (MLS) that show pictures of the inside and out.
Have Proper Home Buying Expectations
Just because it is a buyer’s market doesn’t mean you should make a lowball offer. If you want a home, be realistic. Making the seller angry isn’t a good idea when it is a home you wish to purchase.
A buyer’s market doesn’t mean it’s time to insult the seller with a crazy bid that doesn’t make sense.
Tips For Sellers in a Buyer’s Market
Price Your Home Properly
One of the biggest mistakes in real estate is overpricing. There is nothing that will cause failure more than an overpriced listing. Take the emotion out of pricing your home. Set realistic goals and expectations based on the changes in the market.
The Listing Agent Becomes Vital Again
In a buyer’s market, the agent you choose matters! You want a top producer with a track record of success. You could hire anyone in an extreme seller’s market, and your home would sell. In a buyer’s market, things are no longer easy. You need the best of the best.
Repair Obvious Problems With The Property
Buyers love turnkey houses in any market. In a seller’s market, buyers overlook issues because they have to. They don’t anymore. Homes that are in lousy shape will suffer.
Do what you can to make your home stand out in a good way. Selling as-is isn’t the way to go.
Remove All The Clutter Inside and Out
It can’t be emphasized enough that you have competition. It would be best if you looked like a showplace, not a hoarder’s home. Do everything necessary to make your home look like a blank slate.
Call a junk removal company to remove things you don’t want. Donate items of value to a charity.
Get a self-storage unit nearby or rent a portable storage container. All of these things can make a significant difference in making the property look its best.
Final Thoughts on Buyers Markets
Whether you are buying or selling a home, it will be essential to lean on your real estate agent for proper advice. Market conditions will dictate your direction depending on which side of the fence you’re on.
Keep in mind that the local real estate market could be much different than other places. Following the market trends for your local area will be necessary.
About the Author: The above Real Estate information on what is a buyer’s market was provided by Bill Gassett, a Nationally recognized leader in his field. Bill can be reached via email at billgassett@remaxexec.com or by phone at 508-625-0191. Bill has helped people move in and out of many Metrowest towns for 35+ Years.
Are you thinking of selling your home? I am passionate about real estate and love sharing my marketing expertise!
I service Real Estate Sales in the following Metrowest MA towns: Ashland, Bellingham, Douglas, Framingham, Franklin, Grafton, Holliston, Hopkinton, Hopedale, Medway, Mendon, Milford, Millbury, Millville, Northborough, Northbridge, Shrewsbury, Southborough, Sutton, Wayland, Westborough, Whitinsville, Worcester, Upton, and Uxbridge MA.
There can be different markets within a geographical area based on outside conditions. Price and neighborhood are 2 biggies. For instance, I’ve seen a strong buyers market for homes under $300K while at the same time it’s a seller’s market for anything over $1 Mil.