Real Estate 101: How to Tell the Difference Between a Buyer’s or Seller’s Market
What is the difference between a buyer’s or seller’s market?
Are you in search of a new home, investment property, or the perfect office space for your business? Before looking for a property that will meet all of your needs, be sure to determine whether you’re currently in a buyer’s or seller’s market. Knowing what type of market your area currently has will give you insight as to how much bargaining power you will have.
To save you time, we’ve put together some of the best pieces of advice we can think of when it comes to determining your current market status.
Know the difference between a buyer’s or seller’s market
According to Certified Commercial Investment Member (CCIM) Brian Rosteck, “there is not a universally accepted upside to either [market].” While there are perks and challenges to each market, knowing the status of your area’s real estate market can be crucial when scoring the property you’re looking for. Your realtor is the best source for this information and you can ask them directly for this.
Before you can determine what type of market you’re in, you have to first know the difference between the two types. In a buyer’s market, there is more supply than demand in a neighborhood. In this type of market, you’ll have great negotiating power since there will be a need for properties to sell. When making offers, you’ll find that the seller is more likely to work on your terms in a buyer’s market. Essentially what you find is:
- Inventory is higher than when compared to previous months or years
- There is more than 6 months or more of inventory available on the market. You can determine this through the absorption rate and the month’s supply of inventory calculation. Your realtor can help you with this information.
- Listings stay up longer and you will see higher Days on Market (DOM) numbers
- Current listing prices are lower than previous comparable sale prices
- Overall housing prices are falling
- Likely to see more advertisements and bigger advertisements
- It takes a long time for the “Sold” sign to go up
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Conversely, in a seller’s market, there’s more property demand than supply and you will see the following characteristics:
- Inventory is lower than when compared to previous months or years
- There is less than 3 months of inventory available on the market. You can determine this through the absorption rate and the month’s supply of inventory calculation.
- Listings do not stay up as long and the DOM is generally lower
- Current listing prices are higher than previous comparable sale prices
- Overall housing prices are rising
- Likely to see fewer advertisements
- “For Sale” signs don’t stay around long
What to do as a buyer for a seller’s market
As a buyer in a seller’s market, you’ll have a difficult time low-balling offers during negotiations. By doing so, you may lose the property you’re interested in. Because there is a limited supply of properties, sellers can turn to other buyers very easily without entertaining your offer. For more information on what mistakes to avoid during a seller’s markets check out this article by Trulia.
Most often people hear the two terms applied to real estate, but in reality, they apply to any type of product market.
Do your research
Now that you know the difference between the two definitions, an effective second step is to do your research on the property that’s captured your attention. For instance, you’ll want to take a look at how many days the property has been on the market. In a buyer’s market, it’s common for properties to stay on the market for some time since there is a lot of competition. However, if you’re in a seller’s market and you notice that a property has not sold after a significant amount of time, that could be a good sign to stay away. In this case, it’s possible that the seller overpriced the property. As a result, it became stale. People then assume there’s a problem with it. If you’re unsure about a property or your current market, ask your realtor. They can provide more information and advice before you make your offer.
If you’re concerned about how long a property has been sitting on the market, check with your real estate agent. He or she can give you an idea as to how long their properties typically sit on the market before being sold.
You’re also going to want to look at the neighborhood – are price cuts common in this neighborhood? In a buyer’s market, price cuts will be common and the competition will be few and far between. Whereas in a seller’s market, properties may maintain their selling prices or they may be sold for more than their asking price.
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Let interest rates be your guides
Ah, interest rates, the least fun part about purchasing a home or building. Interest rates are important not only because they can indicate how much cost will be added to the property, but also because they can indicate the type of market your area currently has.
If interest rates are high, buyers will have a difficult time getting mortgages. In this case, you’ll most likely find a lot of properties at discounted prices. You’ll also notice that prices will decline, indicating a buyer’s market.
When interest rates are low, however, money will be easier to come by, therefore buyers will be flooding the market.
Check in with Freddie Mac and Fannie Mae
Government entities are great tools when it comes to determining the current status of your real estate market. Buyers can always rest assured that it’s a good time to purchase a home when Fannie Mae becomes involved. Fannie Mae pushes first-time homebuyers to take the property plunge by offering incentives for them. If you see Fannie Mae and Freddie Mae becoming involved, you’ll know it’s a good time for homeowners to buy.
To better assist homeowners, Freddie Mac launched a financing program called HomeSteps, and another called HomePath. Both participate with a 3% closing cost assistance and lower money down. Whenever these two Government-sponsored enterprises become involved in your market, you’ll discover that it’s best for sellers. And in case you have any doubts, these deals were not around during the housing crash of 2008. Sadly the Freddie Mac and Fannie Mae programs do not apply to property investors, but they are great resources to recommend to homebuyers you work with.
Pay attention to your submarket
When looking for the perfect property, it’s important to know how either type of market will apply to you. When people are on the benefitting side of a market, they “can get cocky and overplay their hand,” says Rosteck. Ultimately, this will lead to losing the property you’ve had your eyes on.
If you’re a buyer and you’ve determined that your area currently has a buyer’s market, it’s possible that things “can be measurably different in the submarkets,” according to Rosteck. An example of this would be your local office space market.
Take the office market in the downtown Cedar Rapids area, for example. Rosteck says that when examining it closely, you’ll find that “the office market as a whole is a buyer’s market with an abundance of properties to look at.” This means that the downtown submarket can be even more competitive than other areas of the city.
In looking at office spaces in the New Bo district or on the northeast side, it’s important to keep in mind that it’s “less of a buyer’s market,” says Rosteck. In these areas, “properties are a little harder to find with owners a little less likely to deal.” In other words, if you’re taking a serious look at an office location in the downtown area, you may want to put in your offer sooner rather than later to avoid losing your chance.
Keep track of the months of inventory
Another way of determining your area’s market status is to look at the months of property inventory. In a buyer’s market, there is typically six or more months of inventory. In a neutral market, you’ll find three to six months of inventory, and in a seller’s market, you’ll discover less than three months of inventory.
Whether you’re a buyer in a buyer’s market or a seller’s market, it’s important to know that either market can work for you as a property investor. Before making an offer on a property, be sure you’ve conducted research on the neighborhood as well as the property itself. It will also be beneficial to keep track of whether or not governmental agencies are making special offers to homebuyers, as this can indicate a buyer’s market. As always, we highly recommend you run the numbers before making any purchase.
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Before you leave:
Disclaimer: The information presented does not consider your particular investment objectives or financial situation and does not make personalized recommendations. This information is not intended to be a substitute for specific individualized tax, legal, or investment planning advice. Where specific advice is necessary or appropriate, AssetRover recommends consultation with a qualified tax advisor, CPA, Financial Planner or Investment Manager.
Don't forget to check out our free rental property calculator. This will be a valuable tool in your arsenal as you analyze your existing or potential rental properties.
Thank you for your ongoing support and happy investing!
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