The real estate market is a competitive one. Here, any buyer or seller must have a working strategy when transacting. Yet, coming up with such a negotiating tact depends on whether you are in the buyer’s market or the seller’s market. How so?
Well, look at it this way. Conditions in the real estate market hardly balance for buyers and sellers. That is, you will sell more houses at competitive prices when operating in the seller’s market. In contrast, the buyer’s market is conducive to any new or existing buyer. For, you can place a low offer and finalize your purchase with little competition. Then, how do you know you are in the right market for your trade in the first place? Let us explore below.
Understanding the Property Market
The trends in the real estate market change as property demand and supply fluctuate. It is a cyclical market that features a steady rise in demand (recovery) that culminates in a peak market (expansion). This demand begins to fall (hyper supply) to its possible low(recession) before the cycle kicks off again.
Hence, when supply overshoots demand, it becomes a buyer’s market with more homes on offer than the potential buyers. But, when there is a boom, demand for housing units skyrockets. Here, there is an irrational excitement amongst buyers, some taking immense loans to purchase new homes. In turn, the homeowners can maintain an upper hand, riding on this enthusiasm to set high prices.
The Buyer’s Market
When in a typical buyer’s market happens during the hyper supply and recession periods of the real estate cycles. Here, anyone looking to buy real estate property dominates the price negotiations. Below are the characteristics of a buyer’s market: –
· Longer Average Days on Market
Unless you know how to price your house right, it may take too long before getting a potential offer. Hence, sellers rely on the average days on market statistics for the existing properties in the last six months to make an informed decision about their pricing. A significant increase in this parameter is a clear indicator that you are operating in the buyer’s market.
· Shorter Monthly Absorption Rates
The monthly absorption rates indicate the sales of the housing units that a seller achieves each month. Consequently, as the sellers struggle to finalize deals in a typical buyer’s market, there is a substantial decline in the monthly absorption rates. A standard buyer’s market has a monthly absorption rate below 15%.
· Falling Median Prices
The median price indicates the prices of houses at the middle point. That is, when you line up the most prized houses to the least expensive units, the median price will be the equivalent of the house that appears in the middle of the datasheet. In turn, this price is not the average price. Note that players in the real estate sector prefer using the median price and not the average price. It eliminates any extreme rates at the two opposite ends that tend to skew the average price.
In a typical buyer’s market, the median price is declining, for the prevailing market conditions make it hard for homeowners to increase their rates. Note that property prices tend to rise over time. Hence, this parameter is a reliable indicator of the type of market in which you operate only for the short term.
· More Days of Inventory
Finally, a buyer’s market experiences more days of inventory. In particular, if it takes a seller more months to sell all his real estate units, then you could be operating in the buyer’s market. Due to the decline in demand for housing units, such sellers will incur more costs to maintain their inventory for long. To determine the number of months needed to clear all the stock, the seller divides the listings by the current absorption rate. A rate above six months is a clear indicator of a prevailing buyer’s market.
Ideal Strategies for Traders in the Buyer’s Market
In a hyper supply market, the buyers must have an opportunistic strategy. That is, as they anticipate the recession, sellers are in a panic mode, offering their housing units are much lower prices. In turn, buyers should take this chance to buy more houses. Such assets will perform well once the recession cycle passes.
Second, in a recession stage, the buyers are spoilt for choice at the number of distressed assets in the market. Hence, lender foreclosures and special servicers become an everyday thing. The buyer acquires such assets with the hope of repositioning them at the end of the recovery stage.
The Seller’s Market
Now, the seller’s market occurs during the recovery and expansion stages of the real estate cycle. Typical market conditions include low-interest rates, favorable economic performance, higher incomes, and cash balances. These favorable conditions mean that there are fewer housing units in the market to satisfy the lucrative offers. Indeed, the buyer’s bidding war is a Black Friday’s feast for the sellers. It leaves the buyer with little or no bargaining power.
The seller’s market has all the four parameters reflecting an opposite effect to that of the buyer’s market as follows:
- Longer Monthly Absorption Rates
A typical seller’s market has a monthly absorption rate above 20%. Then, the sellers can play around with the prices while maintaining the current high demand. Also, homeowners rely on this parameter to further develop their land.
- Diminished Days of Inventory
As the number of property listings reduces while the buyer’s thirst for more units reaches an all-time high, most sellers end up with no inventory to list. In turn, a typical seller’s market has four months of inventory at most.
- Rising Median Prices
High demand in the housing market pushes the median prices up. Any homeowner or seller will see the value of his property go up due to the tight supply and favorable mortgage rates. Typical triggers include a thriving economy and a surge in millennials seeking mortgages as they enter their thirties.
- Shorter Average Days on Market
During recovery or expansion, sellers have their housing units listed for a shorter period. That is, they get multiple offers for their listings almost immediately. In turn, such listings will command higher prices yielding a good return on investment. Then, homeowners always check for this parameter before offering their homes for sale to an agent.
Ideal Strategies for Sellers and Homeowners in the Seller’s Market
During the recovery stage, the sellers should resort to adding value to their housing units as they wait for the expansion phase to start. Likewise, they can take advantage of the ending recession to acquire more property at a bargain. If you are in the rental business, the expansion stage will see a rise in rental incomes. Hence, this can be your chance to inject more cash into core properties.
The expansion phase is a preferred period for sellers and homeowners. Here, there is a boom in demand for leasing space and rental units. If you are risk-averse, now is the time to capitalize on the high tenant retention rates. Other strategies include identifying, buying, and holding capital-starved housing units for a short while as you wait for the hyper supply phase.
Then, do you know your current housing market? If so, are you using the right strategies to get the best return on your investment? Remember, you may also be in a balanced market. Here, the key indicators point in no particular direction. Yet, such conditions are short-lived. Then, use your market conditions to your advantage. This bit of hindsight can help you avoid losses when the real estate cycle shifts against you.