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Ask Brian: What is the Difference Between a Buyer’s Market and a Seller’s Market?

By Brian Kline | November 5, 2018

Ask Brian is a weekly column by Real Estate Expert Brian Kline. If you have questions on real estate investing, DIY, home buying/selling, or other housing inquiries please email your questions to [email protected].

Q1. Cheryl from Bend, Oregon writes: Greetings Brian, I’m hoping you can clear something up for me. A little over two years ago I decided to start looking into buying a house but I didn’t know much about how to do this. When I first talked to a couple of agents, I quickly figured out that I needed to save a much bigger chunk of cash for a down payment than I thought at first. Two years later, I’m close to having the money for a down payment and closing costs. During that time, I did a little more research and learned about home inspections, appraisals, and a few other things. I also kept hearing that it’s a seller’s market and the sooner I could make the purchase, the less I’d have to pay. Now, when I’m close to making an offer, I’m hearing that it’s switching to a buyer’s market. I’d like to know what that means to me today? I’ve asked a couple of agents but got different answers. How do you explain it?

A1. Hello Cheryl, the difference between a seller’s market and a buyer’s market is a question that a lot of people should be asking right about now. It’s been a strong seller’s market for several years but there are clear signs the market is shifting to favor buyers. But as always, real estate depends on the local market and even local neighborhoods. Although there is a general shift towards a buyer’s market, it is happening by different degrees in different locations and you can be certain there are some locations bucking the trend.

At first thought, quite a few people think a buyer’s market means prices are coming down and low-ball offers will be accepted. Probably not at most locations. For instance, in a hot market like Seattle, it means that prices are no longer going up as fast as they have been for many years. It also means that neighborhoods that a few months ago saw bidding wars as soon a s a house went on the market are no longer seeing bidding wars or at least not as many multiple offers and not for significantly more than the asking price. However, due to a pent up demand, sellers in hot markets can still expect to quickly find a buyer at a fair market price.

The best way to understand how significant the shift from a seller’s to a buyer’s market is for your location is by understanding the key drivers:

  • A booming local economy. The national high employment for the past several years was an important factor driving the overall national seller’s real estate market. However, this is still a local issue depending on prevailing local wages. When most new local jobs pay minimum wage, there will be a bigger surge in the rental market compared to the seller’s market. There will be spill over from the rental market that can drive some prices up slightly but mostly, a once slow sales market only begins seeing more active buyers. As we’ve already seen, high wage markets such as technology have much more affect driving rapid price increases supported by bidding wars. But there are exceptions. For instance, a few years ago North Dakota had an explosive wave of temporary high wage jobs in the oil exploration and drilling industry. Home prices sky rocketed 5X, 10X, 15X, and even higher compared to previous prices. With the oil boom gone, home prices in North Dakota are already declining (according to Zillow).
  • Interest rates trending downward or upward have a big impact real estate markets. Interest rates determine the size of a buyer’s monthly mortgage payment and therefore how big of a loan they can qualify for. The lower the interest rate, the more buyers that can qualify for a loan. Buyers can offset this somewhat with a higher down payment which means a small loan but higher down payments mean few buyers. The way sellers counter higher interest rate is first by stabilizing prices and eventually by lowering prices to attract buyers (hence a buyer’s market). Many markets are currently becoming stable as rising interest rates push buyers out of the market.
  • Short term changes in interest rates have short term impacts on real estate markets. Interest rates are expected to mostly remain stable for the next several months, which should mean most real estate markets will be stable. Interest rates change daily and weekly. There is still a pent up demand to buy houses. People who can qualify and lock in a mortgage during a temporary rate drop can jump back into the market to keep it stable. However, the interest rate is generally trending higher which means fewer and fewer buyers will be in the market. This will create more and of a buyer’s market over time.
  • Inventory is the other big driver. Real estate is very much about supply and demand. As the economy has grown, there has been much more demand for houses than there has been supply. Locally, a new housing development brings more supply onto the market. In today’s markets, new homes coming onto the market are also having a stabilizing effect. A stable market is a balanced market that favors neither the buyer nor the seller. A significant amount of inventory coming onto the market can create a buyer’s market. To forecast your local trend over the next nine months to a year, research how many new building permits have been applied for and how many new homes are currently under construction.
  • Sellers of existing homes also impact inventory. There are sellers that have been on the sideline waiting to see how much their home will become worth before putting it up for sale. With prices stabilizing, these people are more likely to jump into the market. Often these people time the market wrong. If too many come on the market, inventory will grow and it will lead to a buyer’s market.

Cheryl, the economy, interest rates, and inventory all work in tandem. In all probability we have already passed the top of the sales peak. The U.S. economy is fully employed. There may be some wage growth and people shifting to higher paying jobs but very few additional people will become employed (stable or decreasing buyer demand). Full employment greatly increases consumer demand for credit cards, cars, and homes. The increased demand to borrow money will continue to increase interest rates. Higher interest rates put the brakes on increasing home prices which have now reached the maximum affordable price. Inventory of houses for sale will increase. Having passed the top of the sales peak, the trend should be towards a buyer’s market over the next 3, 6, and 9 months. For the most part, buyers can expect listing prices to remain stable, no more bidding wars, and negotiating the final sales prices, terms, and conditions will once again become normal.

Our weekly Ask Brian column welcomes questions from readers of all experience levels with residential real estate. Please email your questions or inquiries to [email protected].

Please leave your comments about this Q&A or send us your own.

Author bio: Brian Kline has been investing in real estate for more than 35 years and writing about real estate investing for 12 years. He also draws upon 30 plus years of business experience including 12 years as a manager at Boeing Aircraft Company. Brian currently lives at Lake Cushman, Washington. A vacation destination, a few short miles from a national forest. With the Pacific Ocean a couple of miles in the opposite direction.

Brian Kline has been investing in real estate for more than 30 years and writing about real estate investing for seven years with articles listed on Yahoo Finance, Benzinga, and uRBN. Brian is a regular contributor at Realty Biz News
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