From cocktail parties to backyard barbecues, it seems like everyone around you is talking about how hot the real estate market is. So does that mean you’re in a buyer’s market or a seller’s market?
Like stock prices, the real estate market fluctuates. Think back to the quiz you aced during 10th grade economics with Mrs. Patil: supply and demand. Like weights on opposite sides of a balance scale, a change to one end tips the scale’s balance, affecting the other. When one — supply or demand — outweighs the other, you have a market imbalance.
In real estate, that imbalance translates into either a buyer’s market or a seller’s market. An ample supply (lots of homes for sale) and limited demand (fewer buyers) leads to a buyer’s market. Conversely, lack of supply (fewer homes for sale) and abundant demand (lots of buyers) results in a seller’s market.
When you’re selling, the type of market you’re in makes all difference to your bottom line. It can affect:
- How you prepare your home for sale
- How quickly your home will sell
- How much you’ll net for your home
To help us understand both buyer’s and seller’s markets, we spoke with top real estate agent Kim Rock. The 13-year industry veteran has a track record for selling homes fast — her listings close 65% quicker than the average Philadelphia agent.
Seller’s market: The odds are in your favor
Did you ever stand in line for a New York City cronut in 2014? If so, you’ve experienced something akin to a seller’s market from the buyer’s point of view. The croissant-donut hybrid inspired 100-person lines and scalpers charging $40 per pastry. Supply was limited: Its seller, Dominique Ansel Bakery, couldn’t crank out enough cronuts to keep up with demand.
In a hot real estate market, there are fewer homes on the market than there are buyers. Eager buyers queue up to bid on homes, pushing prices up until the supply catches up with the demand or the demand decreases. Here’s a detailed overview of what a seller’s market looks like in the real estate world and what it means for sellers:
Sellers can expect the benefits of buyers clamoring for their home: higher sales prices and shorter marketing times.
Home prices rise
In a seller’s market, buyers compete for a limited number of available homes. That competition between buyers pushes bid prices up, leading to higher home values. During the hot housing market between 2002 and 2007, average home prices jumped by 42%, according to data from the U.S. Federal Housing Financing Agency (FHFA).
Homes sell faster
Sellers can expect to receive offers faster in a seller’s market than in a buyer’s market. That’s because buyers must make decisions quickly when competing against other buyers, says Rock. “[Buyers] need to decide while [they’re] in the home. Are [they] making an offer, and how quickly can [they] get that offer in the listing agent’s hands?”
The number of days on market (DOM), which marks how long a home is on the market before the seller accepts an offer, typically drops. In a balanced market, marketing time typically lasts around six weeks, according to The National Association of Realtors® (NAR). In a strong seller’s market, that figure can plummet. NAR’s chief economist reported in February 2021 that, on average, homes went under contract in just 20 days. “The swiftest ever,” he remarked.
Bidding wars are more common
Sellers should prepare for a multiple-offer situation. In HomeLight’s Top Agent Insights Report for Q3 2020, 88% of surveyed agents agreed that bidding wars were on the rise or at their peak in light of the “insanely competitive” market. The year prior? Only 36% of surveyed agents shared this sentiment.
Factors that lead to a seller’s market
What makes buyers house-hungry? And why aren’t there enough homes to appease their appetites? A strong economy, reticent home sellers, and lagging new construction all contribute to a seller’s market.
Too few resale homes for sale
When enough homeowners decide to stay put, the lack of resale homes on the market contributes to an inventory shortage. One recent example was the result of a shifting generational trend. A 2018 report released by Freddie Mac found that older homeowners were choosing to stay in their homes rather than sell and downsize. These homes held back from the resale market account for an estimated 1.6 million homes, or half of the estimated housing shortfall at the time.
New builds aren’t keeping up
According to the U.S. Census, as of April 2021, the country’s population grows by one person every 40 seconds. And as the population increases, so does the need for new housing. But when new builds can’t keep up, whether due to labor and lumber limitations or land shortages, the result is the same: fewer homes for buyers to choose from.
Increased buyer demand
The greater the buyer demand, the greater the competition for homes. Here are a few factors that bring buyers to the market:
- Low-interest rates: Owning a home is more affordable with low-interest rates, making homeownership more attractive and increasing buyer demand. When interest rates are low, buyers pay less to borrow money. And with lower interest fees, buyers can afford a higher-priced home.
Bottom line for sellers
Listing your home during a seller’s market puts you in an ideal position. You’re more likely to sell your home quickly and at a higher price. But remember: you’ll be in the buyer’s shoes when it’s time to shop for your next home.
- Your home may sell faster. In a seller’s market, there’s a good chance you’ll have to move out of your house sooner than you think. You’ll have less time to pack, book your moving company, and find a new home. To avoid the stress of a last-minute move, start planning early on.
- You’ll sell your house for more money. With competing buyers and rising home prices, you could net more than what recent sales in your neighborhood suggest. If you’re looking to move, a seller’s market is a great time to cash out on your home equity. Your bank account will thank you!
- You have more leverage in negotiations. Price isn’t the only way buyers can sweeten the deal on an offer. When multiple buyers battle it out for your home, you can negotiate fewer contingencies and better terms. For example, in 2017, a competitive housing market in Western Washington prompted “serious buyers” to waive home inspections and financing contingencies. Buyers may also throw in deal sweeteners such as a seller rent back, which allows you to stay in the home (renting from the buyer for a period of time) after closing.
- You may receive multiple competing offers. In February 2021, NAR reported fierce buyer competition, with an average of four offers submitted for every home sold. As a seller juggling competing offers, you have multiple options for responding. You could choose the “highest and best” offer based on the strength of price and terms and reject the others. Or you could counter back and attempt to negotiate with one or more of the offers you receive. Evaluating the pros and cons of each could be tricky. An experienced real estate agent can help you navigate your choices for the best strategy to sell your home, such as helping you evaluate the strength of an offer beyond its price.
- It may be more difficult to find your next home if you plan to buy. If you’re staying local, you’ll find yourself on the other side of the bargaining table when it’s time to look for your new place. Budget extra time for your home search in a seller’s market. There’s a chance you won’t be the winning offer on the first house bid for.
Buyer’s market: Your buyer has the upper hand
In a buyer’s market, the balance shifts when the number of available homes oustrips buyers who want to purchase them. Like a clearance rack overflowing with last year’s clothing trends, homes are more likely to sit on the market because of low buyer demand.
In this market type, conditions favor buyers, who have more leverage negotiating an offer for a house. Here’s what you can expect to see as a seller when buyers hold the cards:
In a buyer’s market, buyers won’t snap up homes the first weekend they’re listed for sale. Prices can flatten or fall, and you’ll be thankful for every offer.
Home prices may fall
Less competition among buyers, along with an ample selection of homes, can lead to a decline in home prices. In 2008, Case-Schiller reported a record 18% year-over-year drop in its home price index when a glut of homes overwhelmed buyer demand during the Great Recession.
Homes sell slower
Buyers take their time because there’s no sense of urgency like you’d see in a seller’s market, explains Rock. When buyers see a home they like, they “don’t rush in two hours after it’s listed.” In fact, buyers are likely to tour a home multiple times, bringing family or a contractor friend for outside opinions. “People might take a week or two to even make a decision on a house,” Rock adds.
In contrast to a strong seller’s market when sellers may accept a contract in days, sellers can expect their homes to sit on the market for more than six weeks.
Offers may be few and far in between
Unlike a strong seller’s market, when multiple offers tend to come in quickly, offers in a buyer’s market are more likely to trickle in. Rock advises homeowners in a buyer’s market to closely consider the first offer that comes in the door. In her opinion, the first offer is typically your best offer in a buyer’s market.
“If someone makes you an offer quickly in the first few days on the market, they probably are a motivated buyer,” Rock explains.
Factors that lead to a buyer’s market
The market shifts to a buyer’s market when there are more homes for buyers to choose from and less competition to contend with. These factors can swing the market away from a seller’s favor:
Surplus of resale homes and new builds
A flood of homes for sale gives homebuyers more options to choose from. During the Great Recession, an influx of short sales and foreclosures added to the existing resale supply. And before the bubble burst in 2008, construction housing starts topped out at 2,273,000 in January 2006, compared to 490,000 in January 2009.
Lower buyer demand
Low buyer confidence and economic uncertainty can prevent potential buyers from wading into the market, leaving little competition for the smaller pool of homebuyers that remain. These are some of the factors that keep buyers at bay:
Rising interest rates make it more expensive for buyers to borrow money for a mortgage loan, stymieing demand. In the early 1970s, the U.S. Federal Reserve attempted to control rising inflation by increasing interest rates. From February 1972 to September 1973, the federal funds rate more than tripled, and home sales plummeted by 50%.
Increasing unemployment rates, lower spending, and stagnant income levels are all hallmarks of most recessionary periods. Historically, homebuying often tumbles during recessionary periods.
A downturn in local economy
When a local economy suffers, the effect ripples into housing. Fewer jobs hamper buyer demand. A 2016 study published by the St. Louis Federal Reserve reported a link between local unemployment and housing prices. Areas with large declines in housing prices correlate with higher rates of local unemployment.
Bottom line for sellers
Sellers don’t have the same advantages in a buyer’s market as they do in a seller’s market. Not only will you need to make your home shine, but you’ll also need patience and flexibility to snag a buyer. The good news is that finding your next home won’t be as tough.
- It might take longer for your home to sell. Your home could sit on the market for several weeks, and you may even need to cut the price. “You might have to sit for 14 to 30 days and do a price reduction if you don’t have any offers in that time period,” advises Rock.
- You’ll need to make your home stand out against the competition. When you’re competing against other sellers, “you need your house to look pristine,” stresses Rock. Expect to invest more in staging, curb appeal, and light cosmetic upgrades. For instance, Rock says sellers may want to look into repainting or re-doing floors. More extensive work, like a kitchen refresh or roof replacement, could be the ticket to attract a buyer in a competitive market.
- Your buyer has more leverage in negotiations. Don’t expect a full-price offer when you’re selling in a buyer’s market. Rock says that you’re more likely to receive offers that are lower than your listing price. “We’d be lucky if it was 95% of the list price,” she notes.
- You’ll have an easier time purchasing your next house after you sell. While selling in a buyer’s market can be a battle, you’ll benefit from the same market conditions when you buy your next place.
How long does a seller’s or buyer’s market last? It depends
Unfortunately, there’s no crystal ball to tell us how long a buyer’s or seller’s market will last. Economic factors and world events influence the state of the real estate market. And unpredictable phenomena can throw a wrench in any theories (hello, 2020 pandemic?).
Studying historical real estate cycles could provide some insight. Looking at phases in the market since the early 1800s, one economist found that most real estate cycles happen in 18-year periods. In line with this theory, economist Fred E. Foldvary predicted the 2008 housing crash that resulted in the Great Recession. Still, the 18-year cycle theory isn’t foolproof. Two outliers proved the exception: a period during World War II and a severe interest rate hike in the 1970s.
Selling soon? Market conditions matter
You can’t predict the future, but knowing which way the real estate market is leaning can help you make the right decisions for your home sale. If you’re in a seller’s market, you’ll benefit from buyers vying for your home. In a buyer’s market, expect to work harder to sell your home for a solid price.
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