What are buyer’s and seller’s markets?
Everyone wants to get the best deal on a new house, but sometimes that’s easier said than done. Especially following the COVID-19 pandemic, many prospective homebuyers have been left asking, “Why are houses so expensive right now?”
Real estate markets are seasonal by nature, with demand and inventory often fluctuating from month to month. At any given time, you could find yourself house hunting in either a buyer’s market or a seller’s market. Shrewd homebuyers will try to time purchases around buyer’s markets to pay less on a new house and avoid overspending on a mortgage.
Understanding the difference between buyer’s markets and seller’s markets is very important when buying a house. This guide will detail the economic forces that determine the state of the housing market, how market trends impact home prices and the best way to conduct your home search when the competition is fierce.
Buyer’s market vs. seller’s market
First, you'll need to know what distinguishes the two broad types of housing markets and how each impacts your prospects as a homebuyer.
seller's market definition
Seller’s markets are housing markets where demand outweighs available inventory. In other words, there are more interested buyers than houses for sale. These market conditions give sellers the upper hand over buyers, enabling them to dictate the terms of a transaction.
With so much competition, homebuyers may be forced to take more aggressive action to secure a purchase. That can mean making an offer above asking price, waiving contingencies, accepting an as-is home sale or paying the full amount up front and in cash.
Buyer's market definition
A buyer’s market is the polar opposite of a seller’s market: There are more active listings than serious house hunters. All the bargaining power swings to potential buyers because inventory is high and demand is low.
In this environment, buyers can negotiate more forcefully, putting in offers below asking price, requesting seller concessions and demanding other terms of purchase from the seller.
What determines a buyer’s or seller’s market?
The right market conditions need to come together to create a real estate environment that heavily favors one side or the other. Sometimes these forces occur on a national level, but in other cases you may see market conditions vary across different regional markets.
These are the three main driving forces that determine what type of housing market you’re in:
- Inventory
- Consumer demand
- Mortgage lending trends
Inventory
Perhaps the No. 1 factor influencing market conditions is the amount of available inventory. When there are a lot of homes available to purchase, you can afford to be a bit more selective about your options as a homebuyer. Even if a deal falls through, you probably won’t have to wait too long for a comparable alternative to come along.
On the other hand, when listings are few and far between, you might feel the pressure to pounce on the right home. There’s no guarantee that you’ll find a similar piece of property in the same general location within a short amount of time. And that can ramp up the pressure to use any tool at your disposal to out-muscle the competition. Speaking of competition …
Consumer demand
As we noted earlier, housing market performance is often cyclical: Interest tends to ramp up in the springtime, hit its peak in early summer and then taper off. Consumer demand usually starts to dip in the fall before hitting rock bottom during the winter months.
Why are housing markets so susceptible to seasonal changes? When you’re talking about single-family houses, people want to schedule big life changes — like buying or selling a house — around their kids’ school calendars. So, it makes sense that you might start exploring your options in late spring when the school year is winding down with a plan to move over the summer.
That also explains why interest in single-family properties often starts to dry up by the time the fall hits full swing. Who would want to up-end their lives and move when their kids have just started a new school year? Keep in mind these trends are not set in stone, and a drop in consumer demand can actually benefit prospective homebuyers. You can sometimes find better deals by house hunting in the fall precisely because there’s less competition.
What about other types of properties that don’t necessarily cater to families, such as condos? Those marketing cycles tend to overlap with single-family house purchase trends as well, but perhaps for different reasons.
For one, late spring and early summer is the busiest time of year to rent an apartment, which means your lease is more likely to start and end around then. When renters are ready to buy a first home, those purchases are typically scheduled to align with the end of the lease — and that could mean more purchase activity for condos in the spring and summer.
In any event, when consumer demand is high, you’ll face more competition in your search for the perfect home. Pair that situation with low housing stock and suddenly you could be facing an uphill battle to buy any home, much less the right one for you and your family.
Mortgage lending trends
The final piece of the puzzle is the mortgage lending industry. Lending trends can have a huge impact on consumer interest, which will feed into the state of the real estate market.
The most important conditions to keep an eye on are the current mortgage rates. When rates drop, people stand to pay less interest on their home loans. And that can make the prospect of homeownership more enticing than ever.
Buyer’s markets vs. seller’s markets: Home sale prices
As you’ve no doubt already surmised, the state of the housing market directly impacts home sale prices in your area. Low inventory and high demand usually means sellers can raise their asking prices, while the inverse is true when there’s plenty of home listings to pore over and relatively few fellow house hunters hitting the pavement.
As such, here’s a general rule you can follow:
How market type impacts housing prices
- Seller’s market: housing prices increase
- Buyer’s market: housing prices decrease
It’s important to remember that the degree to which these trends impact housing prices can vary by region. Consumer demand may be up nationwide, but some housing markets may see more dampened enthusiasm compared with other metro areas. Prices may not increase at a comparable rate in those locations where interest is still relatively low, even if all other conditions seem ideal for a seller’s market.
For instance, our July 2021 housing report revealed that a fair amount of disparity between pending home sales across the four major regions:
- Northeast: down 6.6% to 92.0—16.9% lower than last year
- Midwest: down 3.3% to 104.6—8.5% lower than last year
- South: down 0.9% to 130.9—6.7% lower than last year
- West: up 1.9% to 99.8—5.7% lower than last year
Are we in a buyer’s market or seller’s market?
Spring 2021 (as well as most of the summer) featured a perfect storm of circumstances that led to a red-hot seller’s market. Although interest rates had ticked back up after bottoming out in 2020, they were still hovering around historic lows.
On top of that, many city dwellers found themselves craving more space in the wake of the COVID-19 pandemic. Plus, the spring inventory was lower than usual due to supply chain issues for key building materials such as lumber, creating a housing scarcity. The result:
Low interest rate + high consumer demand + low inventory = seller’s market
But those conditions can change pretty quickly. In fact, our August 2021 housing report found that inventory was on the rise while home prices lowered a bit, resulting in more purchase activity. While the pendulum hasn’t swung back in the other direction just yet, the intense bidding wars of the spring and summer should cool down somewhat in the fall 2021 market.
How to buy a home in a seller’s market
House hunting in a buyer’s market can be a real treat: plenty of home listings to consider, moderate home prices to fit your budget and relatively little competition to pressure you into making a purchase decision you might regret.
That’s not the case at all when the market favors sellers, and the struggle, as they say, is very real for homebuyers. But that doesn’t mean you can’t find the right home in a highly competitive housing market. Buying a home can be financially advantageous even in a seller’s market. You just need to exercise a little more planning and diligence to navigate the real estate waters.
Follow these steps to put yourself in a better position to buy a home in a seller’s market:
- Get preapproved
- Create your list of must-haves
- Lock down your down payment
- Contact a real estate agent
- Prepare to compromise
Get preapproved
As you’ll quickly see, one of the keys to buying the right house — and not just any old piece of property — in a hot real estate market is speed. You can get away with dragging your feet in a buyer’s market, but when the competition heats up, you can’t afford to dawdle. Someone else will always be waiting in the wings to scoop up a home while you’re mulling over the right offer terms to submit.
You want to have all of your ducks in a row before you even start scheduling showings — ideally even before looking at listings. That means getting your financing in place so sellers know you’re serious about buying their home.
Getting preapproved is, thankfully, a pretty quick and easy process, especially with today’s digital mortgages. Lenders could preapprove you for a home loan within days, if not hours, of submitting your information. Once you have that pre-approval letter in your hand, it’ll be a lot easier to show sellers you mean business.
Create your list of must-haves
Scheduling showings and attending open houses for houses that can’t meet your basic needs will take up a lot of time and energy that could have been better spent elsewhere. Save yourself the hassle by writing up a list of all the features that a house must have to consider a purchase.
Your list can cover the number of bedrooms, home layout, garage size, outdoor space, amenities, location, proximity to restaurants and nightlife — your potential list can go on and on. It’s a lot easier to weed out homes and narrow your search when you know exactly what you’re looking for in a new house.
Lock down your down payment
When you find the house you’ve been searching for, you don’t want to waste precious time crunching the numbers and figuring out how much you can afford to spend on a down payment. You should already know exactly what that number looks like and how you plan to finance the rest of the sale price.
And if you’re worried that you won’t be able to meet the often-cited 20% down payment rule, don’t be. That mortgage myth simply isn’t true. There are plenty of financing avenues to explore that offer flexible down payment options.
Contact a real estate agent
It’s easy to overspend or give up too much when negotiating a home sale in a seller’s market. That’s why you always want an expert in your corner who knows the local market and can give you the best guidance possible. Working with a real estate agent is usually a good idea, whether you're a first-time homebuyer or you’ve gone through this song and dance before. Contact a real estate agent as soon as you’re ready to start viewing houses, possibly even sooner if you need help narrowing down your list of must-have features.
And if a home falls through, your agent will be there to line up more listings to consider and may even get a lead on houses that haven’t hit the market yet.
Prepare to compromise
It may be a bitter pill to swallow, but you need to realize that the seller has most — if not all — of the negotiating power in a seller’s market. While it’s tempting to haggle over the purchase price and request concessions, doing so could drive the seller away.
You might have to settle for paying a little more than you’d like or fixing faulty appliances, outdated fixtures, stained carpets and other defects yourself out of pocket under these circumstances. It’s not ideal, but that can be the cost of buying a house in a competitive real estate market.
When in doubt, don’t be afraid to let the deal fall through. Bidding wars are pretty common in seller’s markets, and sometimes it’s better to simply walk away than overspend on a property. You can always wait out the market and see if more favorable homebuying conditions return.
In conclusion
At any given time, your local housing market could favor either buyers or sellers, and that will greatly impact housing prices and the level of competition you might need to fend off to buy your dream home. If you’re ready to start searching for a new house, you should first ask yourself, “Is it a seller’s market right now?” If so, be ready to spend a little bit more while negotiating a little bit less.
Even in a red-hot housing market, there’s still plenty of hope for prospective homebuyers. You just need to come prepared: Get your financing in order, know what you want from a new house and be ready to move quickly when you find what you’re looking for.
Really, that advice applies to any real estate market. A little prepwork will go a long way when you’re house hunting, even when demand has cooled. The whole homebuying and mortgage process will move much more smoothly if you come ready to lock in your financing and make an offer.