What Is a Buyer's Market?
- Generally, a buyer’s market happens when there are more goods (such as houses) or services for sale than buyers are looking to purchase.
- A real estate market benefits buyers when it takes over six months to sell the entire housing inventory for a given month.
- People shopping around for homes or properties benefit in a buyer’s market due to reduced competition and declining property prices.
What Is a Buyer's Market in Real Estate?
A buyer’s market in real estate occurs when property sales slow down due to excess inventory.
This leads to three primary outcomes:
- Negotiating power shifts toward buyers and away from sellers.
- Realtors, real estate agents, and For Sale By Owner sellers utilize aggressive marketing strategies to attract attention, such as holding open houses.
- Home buyers expect to pay less since they have less competition.
In a buyer’s market, you can take your time and explore numerous listed properties without fearing you’ll miss out on excellent deals. Meanwhile, sellers may feel compelled to lower their asking prices and be more open to negotiation to attract the attention of the few interested buyers.
Consequently, property prices tend to decrease over time since recently sold homes carry more weight than older transactions.
Since buyer’s markets shift negotiating power towards buyers, intense bidding wars are less likely to happen. Consequently, property prices tend to decrease over time due to reduced demand.
Historically, buyer’s markets are more prevalent on a local or regional scale rather than national. They arise from population movement within specific school districts, towns, and neighborhoods.
In other words, finding affordable housing markets is possible even when bidding wars are common. However, some locations may experience rising home prices, even if many potential buyers are not currently in the market or lack the means to purchase a home.
How Many Months of Inventory Is a Buyer's Market?
A buyer’s market occurs if it takes more than six months to sell the entire housing inventory in a given month.
The formula involves dividing the total number of active listings by recently sold homes in a location for one month.
For example, if a town has 100 listed homes but only 15 sold within 30 days, it is a buyer’s market. This is calculated by dividing 100 by 15, which equals 6.67, indicating it would take nearly seven months to exhaust the housing inventory.
However, if 40 out of 100 houses are sold, the town becomes a seller’s market as it would run out of available homes for buyers in two and a half months. A balanced market typically has three to six months’ worth of inventory.
You can calculate months of housing inventory on any geographic level, such as a state, a metropolitan statistical area (MSA), a town, or even a neighborhood.
How to Capitalize on a Buyer’s Market
Home buyers can benefit from a buyer’s market by being financially prepared.
Sometimes, buyer’s markets occur due to economic conditions that affect homebuyers’ ability to qualify for a home loan. An example is a high mortgage rate that prevents many aspiring homebuyers from qualifying for a home loan. Therefore, getting your finances in order well before the real estate market cools down is essential to increase your chances of qualifying.
However, seeking out the most desperate sellers is not recommended solely to make lowball offers. Instead, focus on finding a property that best suits your needs and priorities.
On the other hand, sellers can still succeed in a buyer’s market by implementing effective marketing strategies. Best practices include conducting necessary house repairs, hiring a home stager, showcasing the property’s best features with professional photos, and optimizing the listing.
As a seller, be prepared to make concessions to make the deal more appealing to potential buyers. Accepting this reality is crucial if you genuinely want a buyer to commit.
Buyer’s vs. Seller’s Markets
The difference between buyer’s and seller’s markets is when supply surpasses demand, it’s a buyer’s market, whereas when demand exceeds supply, it’s a seller’s market.
In a seller’s market (also known as a “hot” market), sellers have the advantage as there is less available inventory. While sellers should still ensure their properties are presentable to buyers, they don’t need to market them aggressively in buyer’s markets.
The condition of a house is less of an issue in seller’s markets due to limited inventory and high demand, making it difficult for buyers to be selective. Consequently, “as-is” properties can still attract the attention of property buyers.
However, sellers understand the importance of making their homes move-in ready to attract buyers. By doing so, they can command a higher asking price and receive multiple bids.
What Are the Pros of a Buyers Market?
The benefits of a buyer’s market include a wider range of property options, reduced competition, lower home prices, cheaper home loans, and faster equity growth. The increased housing inventory translates to more opportunities to find the perfect home.
Consequently, when the number of offers is limited, buyers gain more leverage during negotiations, causing listings to remain on the market for an extended period. Even if you don’t find a bargain, you won’t have to overpay to secure a property.
Additionally, purchasing a house at a lower price reduces the amount you need to borrow for financing. While interest rates might be higher than usual, you can lower the overall cost of your debt.
Moreover, having excellent credit enables you to qualify for more favorable interest rates, and making a larger down payment can reduce the principal amount of your loan.
Taking out a mortgage during a buyer’s market can lead to significant benefits from potential appreciation. As real estate investors acquire properties at discounted prices, a buyer’s market can transition into a seller’s market. If this happens, the value of your newly purchased home may increase rapidly, leading to passive growth of your wealth.
However, bidding wars can still occur in hot and cold real estate markets, and some homes will always be so appealing that buyers can’t resist them. Nonetheless, these situations are rare in buyer’s markets.
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