Hot, Cold and Neutral Real Estate Markets
What are Buyer and Seller Real Estate Markets?
When most people decide to sell or buy a home, very few stop to take the temperature of the marketplace or wonder if the market is conducive to the goals at hand. That's because most folks tend to think of their home as a place to live and not as an investment. Then there are Californians, for whom real estate seems to be a secondary, if not primary, religion.
Buyer's Real Estate Markets
If you are a buyer looking to a purchase home in a buyer's real estate market, this is the best financial market in which to buy.
Why? Because there are more homes available for sale than buyers to purchase them. Buyers have more homes to choose among, which increases the odds a buyer will find that perfect home.
In a cold real estate market, serious sellers are often willing to negotiate. This means you can probably buy a home for less than list price, and the seller might be willing to pay some or all of your closing costs. It's a more relaxed experience and easier for buyers.
Signs of a Buyer's Market
- Inventory is high as compared to previous months / years.
- More than six months of inventory is on the market.
- Comparable sale prices are higher than active listing prices.
- Fewer buyers are purchasing, resulting in lower closed sale numbers.
- Median sale prices are declining.
- Real estate ads are getting more ubiquitous.
- For Sale signs are staying up longer, resulting in longer DOM.
How to Compute Months of Inventory
- 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.
For example, in a former buyer's market, we had 8,722 listings available over a given 30-day period. During that time period, 1,021 sales closed.
That left 8.5 months of inventory remaining on the market, making that marketplace a buyer's market.
Seller's Real Estate Markets
If you are a home owner who wants to sell a house in a seller's real estate market, this is the best financial market in which to sell. Why? Because there are more buyers than available houses to buy.
In a hot real estate market, serious buyers are often willing to pay more than list price. This means you can probably sell your home quickly and quite possibly for more than you ask for it. If your market is sizzling hot, you might be able to demand that buyers waive appraisals and inspections, although it's always a good idea to let a buyer have a home inspection. Moreover, without waiving the right in writing, federal law says you must give a buyer 10 days to inspect for lead paint.
Signs of a Seller's Market
- Inventory is very low as compared to previous months / years.
- Fewer than six months of inventory is on the market.
- Comparable sale prices are lower than active listing prices.
- More buyers are purchasing, resulting in higher closed sale numbers.
- Median sale prices are increasing.
- Real estate ads are vanishing.
- For Sale signs are up for a few days before a pending or sold sign is attached.
Neutral Real Estate Markets
These 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, over the past several decades, we have not really experienced neutral markets in most metropolitan areas. Although prior to that time, neutral markets were more common.
Signs of a Neutral Market
- Inventory is normal as compared to previous normal months / years.
- Three to six months of inventory is on the market.
- Comparable sale prices are close to active listing prices.
- Sales numbers have stabilized.
- Median sales prices are flattened.
- Real estate advertising remains uniform.
- For Sale signs are replaced with pending or sold signs within 30 to 45 days.
At the time of writing, Elizabeth Weintraub, CalBRE #00697006, is a Broker-Associate at Lyon Real Estate in Sacramento, California.