Many people have heard the terms “Buyer’s Market” and “Seller’s Market,” but do not recognize the difference. Just like everything in real estate and in the economy, there are a variety of factors that determine whether the real estate market is currently suited for buyers or sellers. But what are these indicators, and what causes the shifts in the market?

A Seller’s Market

For a seller’s market to occur, there must be high demand for homes, thus driving up prices. In order for high demand to occur, there are important economic indicators to keep a close eye on. One of the most important is the labor market in the area. If new jobs are consistently being created, and unemployment is dropping, there will be an influx of people looking for a relatively fixed supply of homes, thus driving up prices. Another indicator that a seller’s market is in effect is that the average time on the market for homes is declining. Because there are so many people looking for homes in a seller’s market, very few homes will last long with the high demand.

One quick metric to look at to determine what type of market there is right now is the absorption rate. The absorption rate is a measure that shows how many homes are selling, relative to how many are available, in a given area and time. For example, if in June there were 200 homes for sale in a given area, and 20 of them sold, the absorption rate is 20/200 = 10%. If the absorption rate is over 20%, that is a signal that the current market is a seller’s market, as homes are selling quickly. If the rate is lower, that means that the supply is much greater than demand, signaling a buyer’s market.

A Buyer’s Market

As we said above, when supply outpaces demand, a buyer’s market is in effect. Because there is so much supply relative to demand, seller’s must lower prices in order to attract potential buyers. Perhaps the biggest indicator on whether it is a buyer’s market is the trend in interest rates. If rates are higher, the cost of borrowing is higher, and the prices of homes must drop in order to meet the new level of demand. Additionally, if there is a short-term drop in interest rates, but you expect them to rise in the near future, the demand for housing will increase exponentially, signaling the beginning of a buyer’s market. The lower interest rates will give borrowers more spending power until the home prices are able to react to the new demand.

A prominent recent example of each of the two types of markets occurred in the 2000s. During the housing bubble, real estate was considered to be a “Seller’s Market” as everyone wanted to buy a house, even if it was overpriced and out of their price range. After the market crashed, housing quickly became a buyer’s market. Because funds were low across the country, the seller had to work hard to generate any sort of interest in their property. Although these are extreme examples, buyer’s markets change into seller’s as season’s change, and then quickly change back. There are a lot of variables that determine what type of market the industry currently is experiencing, but if you are looking at buying or selling a home, it is crucial to determine which it is, as you don’t want to end up buying an overpriced house that could be marked down drastically in a few months as demand falls. As with any purchase, you need to do extensive research when entering the real estate market. By determining what type of market housing is currently in, you can figure out when is the best time for you to make your purchase.

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