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Whether you’re looking for a home or putting yours up for sale, entering the real estate market is exciting. But to put yourself in the strongest position possible, it’s important to know if you’re in a seller’s market or a buyer’s market, and what each one means to you as a buyer or seller.
We’re here to clue you in to the factors that will tell you how to know if it’s a buyer’s or seller’s market. We’ll also let you know what to do in either real estate market, whether you’re a buyer or a seller, to put you at the best possible advantage.
When Is It a Seller’s or Buyer’s Market?
A seller’s market is advantageous for the seller, and a buyer’s market is one where the buyer has the advantage. Whether it’s a buyer’s market vs. a seller’s market is determined by market trends like home prices increasing or housing inventory dropping.
Here are some major factors that contribute to whether you’re in a seller’s or buyer’s market:
Real estate inventory
Real estate inventory is also known as supply and demand. It’s a measure of the number of available homes on the market at a time, and how many buyers there are at that time.
When there are more buyers than sellers, demand for those homes is high, which is good for sellers (imagine the line for an open house snaking around the block!). On the other hand, if there is a lot of housing available for sale but not a lot of buyers, this creates low demand, which favors buyers.
Another major determining factor is if the price of homes in your area has gone up or down, by how much, and if the prices have stuck.
Let’s say you’re looking at the spec sheet for a house that’s on the market again after it sold 2 years ago. Is the asking price 10% more than the last sale price? Or has the price dropped to 10% under the price it last sold for? Have you noticed that the prices of homes for sale keep getting cut?
When demand is high, prices tend to go up. Depending on how much demand there is, asking prices can go up substantially, which is great for sellers. Of course, lower prices are great for buyers.
Length of time on the market
This means how long homes are up for sale before being sold. Have you noticed housing sitting on the market for a while? Or does it seem like “for sale” signs are up for a blip before the “sold” placard is added? Quick sales indicate increased demand, which points to a seller’s market.
When mortgage rates are low, buying a house is more affordable. This usually means more buyers looking for homes, which is good for the seller.
If mortgage rates are high, buying a home becomes more expensive, so more people get priced out of the market. If you’re a home buyer, even though purchasing a home is a more costly proposition when mortgage rates are high, fewer buyers means less competition for homes.
Now that you know some of the factors to keep in mind, let’s examine what seller’s and buyer’s markets look like, and what a buyer or seller should do in each type of market.
What Is a Seller’s Market?
In a seller’s market, the demand for homes is larger than the available inventory. In other words, more people want to buy a home than there are homes for sale. Here’s why this is advantageous for a seller:
Higher asking price
First, sellers can feel confident asking a higher price for a home, knowing that with so many more prospective buyers than usual, it’s likely they’ll get more money than they normally would.
Higher offers, and more of them
Increased demand increases the number of offers. And when multiple buyers are vying for a home, this creates competition among the buyers to beat out each others’ offers.
This can make buyers more willing to offer more money for a home than they would if the competition weren’t so stiff.
Fewer negotiations or repairs
As buyers compete with each other and make offers to beat out other offers, prices are driven up in a bidding war. Negotiations can get tossed out the window and sometimes, buyers even forgo inspections to get the house.
When there are fewer homes and more buyers, there can be a rush to get offers in quickly. This makes it more likely that an acceptable offer will be received sooner than later, and the home will sell more quickly.
Tips for buyers in a seller’s market
So, what do you do if you’re a buyer in a seller’s market? Don’t be discouraged! There are several things that buyers can do to gain an edge in a seller’s market:
In a seller’s market, if a house is priced right, it’s best to move fast. If you wait around, you’ll probably lose out on the house. Cue the sad trombone.
You can help speed the process along by knowing what you want, what the deal breakers are and sticking to the list. Then, if a home checks all the boxes, you won’t have to hem and haw before putting that offer in.
Getting preapproved for a mortgage
If you’re a buyer, getting preapproved for a mortgage can give you an edge over buyers who haven’t been through the process.
Having all your financial information complete and ready to go will not only help make a faster sale, but it shows the seller you’re serious. This can help you improve your position as a buyer.
Plus, in a seller’s market, real estate agents will sometimes require a mortgage preapproval to even step foot into an open house to keep a healthy stream of visitors from becoming a crowd. Having that preapproval at the get-go is like having the key to the (open) house.
Waive home sale contingencies
So, you’re looking for a new home, but to pay for it, you want to use the money from the sale of your current home.
Usually, this is done with a home sale contingency. In essence, it’s an offer with a promise to finish buying the house when you’re done selling yours, usually by a preset deadline.
Sound good? Not so much to sellers in a seller’s market. Contingencies can delay the sale weeks or months, and make it easier for the buyer to back out on the deal. In a seller’s market, sellers will often automatically eliminate any contingent offers from consideration.
To get a better chance to be part of the running, buyers may wish to consider nixing the home contingency, if it’s possible.
Some home buyers get around contingencies by securing other loan types upfront, such as home equity loans, “piggyback” mortgages and bridge loans. Other financing models can also help people from underserved communities compete in a seller’s market.
As always, be sure to consult a lender to see which might be appropriate for you.
Pay in cash
If you’ve got enough money to purchase a home outright, a cash offer is the surest way to put your offer at or near the top of the pile. These offers close more quickly and with fewer potential hiccups and delays of contingent offers, and without financing issues that can crop up with mortgage offers.
Know your limits
It’s all too easy to get caught up in the competitive spirit of a bidding war. Just make sure your wallet doesn’t get too caught up in it, too. Be sure the fervor of getting that house doesn’t lead you to offer more than you can afford.
Beware, too, of setting your sights on a house that doesn’t meet your needs, just because it’s the only one on the market that comes close.
It helps to make a list of what you’re looking for in a house and how much you can comfortably afford. Refer to it often to remember what it is you don’t want, and what you can’t spend.
Tips for sellers in a seller’s market
Think that all you need to do in a seller’s market is to list your house, put on your soft pants and relax? Au contraire. Here are some tips for sellers to attract buyers, close quickly and make the whole home-selling process easier.
Price it right
If you’re the seller, it’s always a good idea to price your home fairly to encourage more prospective buyers. Just because it’s a seller’s market doesn’t mean you can slap an exorbitant price tag on your home.
You still want to attract buyers, and you want them to be serious about paying for your house. If you price your house just below the assessed value, you could encourage a bidding war, which will get the price up anyway.
Give offers careful consideration
When offers come rolling in, take your time looking at them. Don’t just go for the highest bidder. Accepting an offer that ends up being too high for the buyer to make good on will probably lead to putting the house back on the market, which is something you don’t want.
Give all buyers equal consideration and be sure to familiarize yourself with the Fair Housing Act. Your real estate agent can be a great source of information and advice on reading offers and choosing the right one.
Look for preapprovals
A preapproved mortgage is golden when it comes to offers. This means that the buyer has already qualified for a loan and is pretty likely to get it. Be aware that preapproval is better than prequalification, which just estimates how much of a loan the buyer will be able to get.
Be wise about contingencies
We’ve discussed home contingencies, but there are other kinds, too. A contingency is a stipulation or condition of the offer, meaning that the offer will only go through if that condition is met.
A mortgage contingency means the buyer needs to get a mortgage before the sale goes through. An inspection contingency means the house has to pass inspection. Contingencies give the buyer significant leeway to back out of the purchase, so be sure you’ve weighed each one.
What Is a Buyer’s Market?
Like in a seller’s market, supply and demand reign supreme. If the available inventory of homes is high, but there aren’t so many people in the market to buy, it’s a buyer’s market. In other words, there are a lot of sellers competing for a small number of buyers.
Here are some of the advantages this creates for the buyer:
Homes that are priced lower
Sellers need to entice buyers. One way to do that is to make a house competitively priced. Think about it: If there are two almost identical houses for sale and one is priced 20% lower than the rest – well, who doesn’t want to save money?
Fewer and lower offers
If there are fewer interested buyers, the seller will receive fewer offers. This puts buyers in a great competitive position.
Instead of going up against 15 offers, for instance, there may be only a handful, so the odds of emerging victorious are better. It’s even possible, depending on how much of a buyer’s market it is, that your offer will be the only one.
Plus, when there’s not a lot of competition, there’s probably not a bidding war. Translation? Buyers’ offers are less likely to rocket into the stratosphere. The offers will probably be lower, with the possibility of some “low-ball” (way under asking price) offers.
Greater possibility for negotiations and concessions
When there are fewer offers, buyers can be more demanding. How so?
They can stipulate in the offer that something needs to happen, like that big swing set needs to be removed. Or they can, after the inspection, ask for money off the sale price to cover the cost of a needed repair, like fixing those loose boards on the deck.
Of course, the seller can balk and say “no way,” but then the buyer has more leeway to walk away from the deal. The seller wouldn’t want that to happen in any market, let alone in a buyer’s market where the next offer could be weeks or months away.
Slower buying process
When there are fewer buyers, there are fewer offers, and they may not come in right away. Buyers will generally not feel rushed to get their offers in.
Plus, negotiations, which are more likely in a buyer’s market, can add time. (Think inspections, appraisals and repairs.) Add in a home sale contingency and time for the buyer’s loan process to be completed, and you’re talking additional days, weeks or months.
Tips for buyers in a buyer’s market
Even in a buyer’s market, prospective buyers will want to develop strategies for getting the best house at the right price. Some best practices are:
Take your time
There’s no need to rush or feel that unless you act fast, you’ll miss out on a home. Make sure you’re giving each property your due diligence. And if you do miss out on a home, know that there will be others.
Get to know what’s out there. Ask your realtor, go online, drive around – and go to open houses to get a feel for what’s on the market and for what price.
Remember, in a buyer’s market, because you may be able to get a house for less money, you might have money left over for a project like a small renovation, exterior paint job or new landscaping. Keep all those numbers in mind when you make your offer.
Put yourself in a good position
Just because there will be fewer offers doesn’t mean there won’t be any. You still want to position yourself as a good buyer. So, getting preapproved for a mortgage is still a good idea.
Although a strings-free offer will be more attractive to sellers, having an inspection contingency is a wise move, so you’re not surprised by unforeseen issues with the home. And a mortgage contingency can help you not get stuck paying two mortgages for too long.
Tips for sellers in a buyer’s market
In a buyer’s market, you’ll need to do all you can to maximize interest in the home you’re selling.
Clean, organize and declutter
Make sure your home is spotless from top to bottom, and that everything is in its place. Put away or store anything “extra,” like stacks of papers, a lot of decorative items on surfaces, or toiletries.
Make sure your home is priced right. Check the comps to understand what homes that recently sold in your neighborhood went for, and what homes are listed at now.
Setting your price at market value, or just under it, will put you in a good place to attract buyers. If you’re itching for ringside seats to a bidding war, pricing your home just under the assessed value might encourage one.
Look for mortgage preapproval in offers …
Preapproval for a loan means that a buyer’s finances have already been verified by a lender, making them more likely to get that loan when it comes time to make the actual purchase.
… but consider all offers
In a buyer’s market, a seller should take a look at all offers. Yes, contingencies can mean a buyer can back out of the purchase if those stipulations aren’t met.
It might just be worth that risk. Accepting an offer with a contingency like a mortgage contingency, inspection contingency or others may just be the thing that gets your house sold. Be sure to discuss it thoroughly with your real estate agent.
No Matter the Market, Put the Odds in Your Favor
Whether you’re a buyer or a seller, it’s important to understand the current real estate market trends in your area. Take a look at how many homes are for sale at a time, and notice if they languish on the market or seem to disappear almost as soon as they’re listed.
Keep watching the whole time you’re in the market, as housing trends can change whether it’s a home buyer’s or seller’s market.
Getting the advice of a reputable real estate agent will help you get a better understanding of housing market conditions, how to price your home or how to put in a competitive offer in either the next buyer’s market or seller’s market.