Far too few people who decide to sell or buy a home stop to consider the state of the housing market. This is because most people think of their home as a place to live and not as an investment. In reality, real estate is an investment. Like any investment, there are good times and bad times to sell. When it's a bad time to sell, it's usually a good time to buy. That's why you'll hear terms like "buyer's market" or "seller's market." Another way to refer to these trends is known as taking the temperature of the market—a buyer's market is "cold," and a seller's market is "hot."
Here you'll learn how to take the temperature of the market, and what to look for to determine whether it's a buyer's market or a seller's market.
What's the Difference Between a Buyer's and a Seller's Real Estate Market?
|Buyer's Market||Seller's Market||Neutral Market|
|High home inventory||Low home inventory||Inventory is normal compared to previous months/years|
|Comparable sale prices are higher than active listing prices||Active listing prices are higher than comparable sale prices||Comparable sale prices are close to active listing prices|
|Houses stay on the market for months or more||Houses are sold in days or weeks||Houses are sold within 30 - 45 days on average|
When there are more homes available for sale than buyers to purchase them, those buyers are enjoying a cold market. Buyers have more homes to choose from, which increases the odds that a buyer will find their perfect home. When they find that perfect home, they'll have less competition for it, which could help them avoid a bidding war.
On the other hand, a seller's market—or "hot"" real estate market—is the best financial market in which to sell. Why? Because there are more buyers than houses available to buy.
If your market is sizzling hot, you might be able to demand that buyers waive appraisals and inspections, within reason. It's always a good idea to let a buyer have a home inspection.
Even in the hottest of markets, there are legal issues to be aware of before selling a home too quickly. For instance, without waiving the right in writing, federal law says you must give a buyer 10 days to inspect for lead paint.
In a cold real estate market, serious sellers are often willing to negotiate. This means you can probably buy a home for less than the list price, and the seller might be willing to pay some or all of your closing costs. It's an easier and more relaxed experience for buyers. When fewer buyers are purchasing homes, closing numbers are also lower. Overall, a buyer's market will see a decline in median sale prices.
In a seller's real estate market, serious buyers are often willing to pay more than the list price. This means you can probably sell your home quickly, and quite possibly for more than you ask for it. More buyers are purchasing homes will result in higher closing sale numbers, and an increase in median sale prices overall.
For purposes of comparison, in a neutral market, that favors neither the buyer or the seller, comparable sale prices are close to active listing prices. Sales numbers will have stabilized. And median sales prices over a span of time are flattened.
Days on the Market
The average amount of time it takes for a home to sell, or the "days on the market" (DOM) is a useful way to gauge whether a market is hot or cold at any given time.
In a buyer's market, houses have greater DOMs. You may notice "For Sale" signs staying up longer, and a more ubiquitous real estate advertising presence on lawns, billboards, and street benches.
In a seller's market, you may notice that real estate ads are vanishing, and "For sale" signs are up for only a few days before a "sale pending" or "sold" sign is attached.
An average amount of time for a house to stay on the market in neutral conditions is around 30 to 45 days.
Neutral real estate markets are balanced. Typically, interest rates are affordable and the number of buyers and sellers in the marketplace are equalized. The scales don't tip in either direction, meaning the market is normal without experiencing volatile swings. For some reason, we have not experienced neutral markets in most metropolitan areas for several decades. However, in the mid-20th century, neutral markets were more common.
Computing "Months of Inventory"
While it isn't the only metric used to gauge whether it's a seller's market or a buyer's market, one key term you'll hear repeatedly is "months of inventory." This refers to a hypothetical scenario in which no new homes become available for sale.
If this happened, and buyers could only choose from the houses that are already on the market, "months of inventory" is how many months it would take to buy up every house on the market. Calculating this metric isn't hard once you have the data:
- Find the total number of active listings on the market last month.
- Find the total number of sold or closed transactions for last month.
- Divide the number of total listings by the number of total sales, which results in the number of months of inventory remaining.
Here's an example: Let's say there were 8,722 listings available last month. During that timeframe, 1,021 sales closed. That gives us roughly 8.5 months of inventory, making that marketplace a buyer's market.
Six "months of inventory" is regarded as neutral. Any more, and it's a buyer's market (more inventory means more options for buyers and less competition). Any less, and it becomes a seller's market.
The Bottom Line
In real estate, a buyer's market is considered "cold," and a seller's market is considered "hot." When there are more homes available for sale than buyers to purchase them, those buyers are enjoying a cold market, and it's a great time to buy. A hot real estate market is the best financial market in which to sell because there are more buyers than houses available to buy.
When you can think of your home as more than just a place to live, but as an investment, you'll see how important it is to time the sale, or purchase, of your home with the temperature of the market.