Understanding Real Estate Market Types to Time the Market
Can You Beat the Real Estate Market?
It's likely that billionaire real estate tycoons such as Chicago's Sam Zell, and Santa Barbara's Tom Barrack would collectively agree that nobody can time the real estate market, not even them. It may leave you wondering: If the pros can't time the market, how can you?
For starters, you can employ the same techniques that have worked for many who live by the creed: Buy low and sell high. The first step is to determine the type of real estate market that exists in your town.
Types of Real Estate Markets
Although there are many variations and twists, basically real estate markets fall into three categories of buyer's markets, seller's markets, and neutral markets.
Buyer's markets exist when there is more inventory, meaning houses for sale, than buyers. Because buyers have many homes to choose from, not every home for sale will sell. Most experts agree that if six months or more of inventory is on the market, it is a buyer's market. Also note that in buyer's markets, fewer numbers of buyers will result in fewer sales, which can skew median prices.
Conversely, in seller's markets, there are more buyers than available inventory. Because there are fewer homes for buyers to choose among, almost every home will sell. Typically, there is much less than six months of inventory in a seller's market. In extreme seller's markets, there are less than two months of inventory in reserve.
Neutral 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. Inventory is generally around four months, give or take. Note that good buys exist in neutral markets, but there are no overall indications that favor buyers over sellers or vice versa.
Buying in a Buyer's Market
If you are going to buy a home and can afford to wait for primo conditions, a buyer's market is it. There is no better timing to get a new home or buy an investment property.
Sellers are more willing to wheel and deal because they know—or should know—that if they refuse to accept your purchase offer, they might not receive another. When fewer homes are selling, prices typically fall.
Buyers can ask sellers to pay their closing costs, providing their lender will allow the credit. Buyers can also expect sellers will pay for special reports such as pest inspections or roof certifications and a home warranty. If the home is in need of repairs or updating its systems, sellers will often credit the buyer for the repairs or fix the problem(s) noted by a home inspector. Buyers can ask for longer inspection periods, extend closing deadlines and ask for early possession, terms that would be automatically rejected in a seller's market.
Sellers are generally more agreeable to accepting a contingent offer that is dependent on the buyer selling the buyer's existing home. An offer in the hand is better than no offer at all.
Selling in a Buyer's Market
If a seller does not need to sell, there could be a downside to putting a home on the market in a buyer's market. Sellers in soft markets lose equity. Because there is little demand for homes it will put pressure on sales prices pushing the market downward. This downward momentum causes many buyers to make lowball offers.
Homebuyers will frequently ask sellers to pay for all or a majority of the closing costs, thereby lowering the seller's net proceeds. Buyers may also make sales contingent on events such as them selling their home. However, in this poor selling market, the buyers home may also take time to sell.
Buyers know they are in the driver's seat during a buyer's market. They may demand the seller make upgrades or repairs as part of the purchase deal. All those little things sellers have put off repairing will pop up in the home inspection, and buyers expect sellers to fix them.
Further, buyers will tend to ask for "out" clauses that would let them walk away from the deal all the way to the day of closing.
Buying in a Seller's Market
If a buyer has no urgency to buy a home, a seller's market is not an ideal time to buy. There are several disadvantages to buying a home in a seller's market with some of the most obvious concerning the price.
Multiple offers are common. Sellers command top or list price and get it, sometimes more. The market-happy sellers are reluctant to pay any of the buyer's closing costs or pay for inspections. Because the market is flush with buyers, sellers will typically tell buyers to purchase the home "as is" and decline to make repairs or reduce the price for repairs.
Most sellers will not bend from the original contract, regardless of circumstances, because there are three more buyers around the corner.
Selling in a Seller's Market
If you are selling a home in a seller's market, it is the best time to be a seller. The list-to-sales-price ratios are lower in seller's markets, meaning sellers command higher prices, sometimes well over the list price.
They have the leverage to refuse to pay buyer's closing costs, and they often reject offers asking for seller-paid inspections. Buyers may still obtain home inspections but will usually forego a request for repairs, accepting the property "as is." Also, since the seller is in control it's common for sellers to negotiate shorter inspection periods and to expect buyers to waive certain contingencies such as appraisal or loan contingencies.
Buyers who also need to sell their home before buying will find it easier to sell their homes. These buyers are playing both sides of the seller's market and must find a balance in selling their current home and buying their future home.
At the time of writing, Elizabeth Weintraub, BRE # 00697006, is a Broker-Associate at Lyon Real Estate in Sacramento, California.