How to Determine if it is a Buyer’s Market

Historically low mortgage rates, an uptick in remote work, and various other factors have led many Americans to search for a new place to call home. But is now the best time to buy? The housing market can be incredibly confusing, especially in the midst of a global pandemic and economic recession. Plus, the housing market can change in the blink of an eye, so it is often difficult to determine if it is a buyer’s or seller’s market. Not only are consumers wanting to know if it is still a buyers market, many want to know how to tell if they are currently in a buyer’s market.

 In the current climate, staying informed is key to figuring out which is which — and finding the best time to buy.

How to Determine A Buyer's Market

What Is a Buyer’s Market?

A buyer’s market occurs when supply exceeds demand, or there are more homes for sale than there are interested buyers. These conditions give buyers leverage over sellers so that they have more negotiating power. Subsequently, prices are usually lower and homes linger on the market longer. Sellers must compete with one another to attract buyers and many must relist their homes or lower the prices to do so.

This is the ideal time to buy a home, since sellers are much more likely to throw in special offers to keep you from walking away. Many are also willing to deep clean their homes, add fences/gutters/landscaping and make repairs so there are new and improved features to entice potential buyers.

Make sure these additions truly add value to the home and do not cover up foundational issues before letting them tempt you too much. Otherwise, you might overpay and still have to make repairs after moving in.

Buyer’s vs. Seller’s Market

Unlike a buyer’s market, a seller’s market occurs when there are more interested buyers than there are available homes. Inventory is low, so buyers must compete for affordable prices. Often, bidding wars will ensue and some buyers will pay much more than the listing price to secure the home of their dreams. Those who can not afford to do so will have no choice but to rent, which will eventually help the housing market come full circle.

Shorter days on the market are also common when it is a seller’s paradise, so buyers must act quickly. Some homes do not even make it to the market before being sold during this time. In these instances, the properties sell through word-of-mouth before the owners have a chance to list them. Thus, it is not uncommon to see fewer “for sale” signs when it is a seller’s market. You may have to know somebody who knows somebody to find an affordable home in a great neighborhood.

Factors to Consider in a Buyer’s Market

How to Determine When It's A Buyer's Market

The real estate market moves in a natural cycle, constantly switching from a seller’s market to a  buyer’s and vice versa. Because this shift can occur rapidly, it is often difficult to determine whether it’s a buyer’s market. First-time buyers can also skew the market when interest rates rise and they are priced out.

Meanwhile, current events like pandemics and an economic recession affect the market as well. Evidently, there are many factors to consider when determining whether it’s a buyer’s or seller’s market.

Available Inventory

As the world evolves, many people are reconsidering their living situations. If you work from home now, maybe you’re considering a house with office space. Are the kids homeschooling from here on out? A few more square feet could provide enough room for a play area or a designated place to learn and teach. These shifting needs and wants among current homeowners are currently fueling an increase in demand, which has resulted in historically low inventory.

Regardless of when you buy or sell, you can determine how many months of inventory are available using a simple mathematical formula. Divide the current number of homes available by the number of sales in the past 30 days. If the market has more than six months of available inventory, it’s a buyer’s market. If there’s less, it’s a seller’s market. A balanced or neutral market usually has about six months of inventory and favors neither buyers nor sellers.

Population and Job Growth

An area’s population and job growth potential can also affect home prices, supply, and demand. If these factors are trending upward, it becomes a seller’s market. However, if they’re consistently trending downward, buyers have the upper hand. Even so, you must consider whether this trend will continue or you might score an affordable home you can’t manage to resell later.

A similar situation unraveled in Detroit, Michigan, during the early 2000s subprime mortgage crisis. Frequent moves and homelessness caused median sale prices to fall below $10,000, making it a buyer’s market. Yet, few people took advantage of these record lows because population and job growth were plummeting, and so would their property values.

Government Policies and Subsidies

Legislation can have a significant impact on property demand and prices. Tax credits, subsidies, deductions, and other incentives can encourage more people to purchase homes. Initially, these stimuli create a neutral market or one that favors buyers. However, as demand increases, the tables may turn to favor sellers. In this case, no amount of incentives will convince people to purchase homes until demand once again declines.

Thus, keeping an eye on government incentives can help you predict market fluctuations and even identify false trends. For example, the U.S. government introduced an incentive in 2009 that favored first-time homebuyers who purchased property between 2008 and 2010. More than 2 million people took advantage of this perk and created a temporary spike in demand. Without knowing why these changes occurred, you might have attributed them to other factors and painted an inaccurate and unreliable picture of the real estate market at the time.

Property Development Trends

Analyzing and forecasting property development trends is key to determining whether it’s a buyer’s or seller’s market. Typically, housing prices go up when materials and labor are in high demand or short supply, as is the case in 2021. For months, builders have been grappling with a lumber shortage, which has caused prices to skyrocket. Nearly half of builders are passing the cost on to buyers via escalation clauses, which can raise the price of a new home by 10%.

Labor shortages within the construction industry have also resulted in rising home prices and solidified 2021 as a seller’s market. Even before the pandemic, there were too few workers to adequately meet demand. Now, businesses will have to hire more than 1 million workers within the next two years to keep up. If they can’t find workers, costs will continue to trend upward and the real estate market will continue to favor sellers over buyers or builders.

Price Fluctuations

If properties are consistently selling below their original listing price, you might be entering a buyer’s market. If so, you’ll likely notice multiple price cuts and re-listings in an effort to make the listing appear fresh. Sellers will also offer buyer incentives like paying points and closing costs to entice reluctant buyers. In these instances, sellers may or may not lower the listing price.

Price fluctuations in the opposite direction favor the seller. As median home prices climb higher, buyers have less negotiating power and will often settle for a house that doesn’t suit their needs but costs more than they were ever willing to pay.

What if most homes sell close to their original listing price, instead? Odds are good the market is either neutral or demand is strong and consistent. The latter typically favors sellers.

Days on Market

What To Know About the Current Real Estate Market

Days on market — or DOM — refers to the number of days a property is on the market before it goes under contract. If a property has a low number of DOM, it’s either a new listing or there are a number of interested buyers, which could indicate a seller’s market. In this case, the home may be overpriced and the seller probably won’t be very willing to negotiate.

If, however, most homes on the market have a high DOM, buyers likely have the upper hand. At this point, some may have already had price reductions, which can incentivize buyers to make a purchase. As more sellers follow suit, the average DOM may drop, but the market will remain in the hands of buyers until demand exceeds the available supply.

Mortgage Rates

Mortgage loans come in two primary forms: fixed-rate and adjustable-rate. Both come with interest you’ll have to pay back to the lender. However, the latter may fluctuate with the economy and the real estate market throughout the repayment period. When rates are high, the cost of debt rises and discourages people from borrowing. In turn, the demand for homes decreases until rates drop again and the market shifts to favor buyers.

Fixed-rate mortgages remain the same throughout your repayment period but can fluctuate in the years and months leading up to a home purchase. These rates are highly correlated with the yield of the U.S. Treasury 10-year bond, so you can forecast changes by following what the market is saying about the Federal Reserve. Keeping an eye on the economy can also help you determine bond prices. If it’s strong and inflation is rising, mortgage rates will rise too — and vice versa.

Foreclosure Rates

Homeowners who can not keep up with their mortgage payments risk being foreclosed on by their lenders. Meanwhile, those with negative equity may decide to give their properties back to the bank. Both instances can drive up foreclosure rates and lower the price of other homes nearby through the supply effect. This situation creates a buyer’s market by providing more opportunities for investors to score properties below their market value.

However, buyers should beware of foreclosure tsunamis in one area or another because they can signal an indefinite downward trend within the local real estate market. In this case, some buildings may sit vacant and abandoned for years, which is linked to increased crime rates and declining property values. The strength of the regional economy will also determine whether the market truly favors the buyer or is a loss for both sellers and buyers.

The Market in 2021 and Beyond

Early on in the COVID-19 crisis, it seemed that the housing m

arket could collapse. Instead, home prices have surged 24% and foreclosure moratoriums have limited available supply. Subsequently, the market has recently favored sellers and will likely do so well into next year. Even if the majority of homeowners choose to sell rather than repay their mortgage, prices will continue to rise rapidly because inventory is at a 40-year low.

Recent data also shows a short-term increase in median inflation prices, which will inevitably boost home prices. Disruptions to the labor market, expensive home-building materials, and a lack of housing supply will only exacerbate things. However, historically low mortgage rates and an improving economy should give buyers some hope moving forward. The Federal Reserve will play a key role by keeping borrowing costs low for short-term loans, too, as more sellers plan to list their homes in the coming months.

Buying in a Seller’s Market

Of course, the best way to find your dream home without breaking the bank is to wait until the market favors buyers. However, it could be years before the market shifts and conditions improve. Therefore, if you must purchase property while it is a seller’s market, the following tips may help:

  • Act fast: Affordable homes are in short supply, so you must make quick, calculated decisions if you want to score a great property at a reasonable price.
  • Prepare for bidding wars: If competitive bidding breaks out, you must have enough money to bid above the initial asking price to stay in the running.
  • Set a spending limit: At the same time, you must establish price discipline and refrain from getting carried away. Otherwise, you might agree to a higher price point than is feasible for your financial situation.
  • Get preapproved: Obtaining preapproval will help you figure out how much buying power you have and how much house you can actually afford. Your offer may also have more credibility if it’s stamped with a seal of preapproval.
  • Settle for a fixer-upper: Inventory is low, which means you can not be choosy right now. Prioritize location and lot size over aesthetics that you can easily remodel later.
  • Understand your lack of power: You do not have much negotiating power in a seller’s market, so forget lowball tactics. If you must negotiate, make a strong offer with reasonable contingencies.
  • Look for windows of opportunity: Homes that come back on the market after a deal falls through will often list for a lower price. In this case, the seller may become frustrated and more willing to negotiate, which can help you score a better deal on your home.
  • Invest in REITs: Purchase real estate investment funds. Unlike property values, REITs are diversified holdings that aren’t tied to economic cycles and can withstand downturns, making them more secure investments than purchasing homes.
  • Choose a great agent: When the competition is fierce, it helps to have an expert in your corner. Hire a real estate agent who has experience in the neighborhood you’re interested in and is both highly responsive and efficient.

Whether you are selling, buying, or waiting to do either, making the right choice all comes down to doing what’s best for you and your family. If you must move, then move. If you plan to stay in your new home for five-plus years, the market will fluctuate at least a few more times before you have to move again. Then, you can take advantage of the seller’s market and break even — or turn a profit — whenever it’s time to sell.

If you found this article on buyer’s markets helpful, please share the article so more consumers can benefit from the information. Happy house hunting!

About Anita Clark Realtor

Anita Clark has written 614 posts on this blog.

Anita is a residential Real Estate Agent in Warner Robins Georgia, with Coldwell Banker Access Realty (478) 953-8595, aiding buyers and sellers with all their real estate questions on her Warner Robins blog.