When considering real estate, people often talk about whether it is a buyer’s market or a seller’s market. Most people understand that these different conditions favor either the buyer or seller, but it is harder to understand what makes it a buyer’s or seller’s market. The answer is both simple and complex.
Defining the Markets
Deciding whether we are in a buyer’s market or a seller’s market is a simple equation of understanding supply and demand. In the case of the real estate market, supply refers to the number of homes on the market and demand refers to how many people are buying them.
It is said to be a buyer’s market when there is more supply than demand because sellers have to compete (i.e., lower prices) to make their homes more attractive. A seller’s market occurs when there is more demand than supply because buyers have to compete (i.e., pay more) to get the house they want before another buyer snatches it up.
Understanding Supply and Demand
Supply and demand in a market is typically calculated based on the amount of time it takes to sell the inventory (the number of homes on the market). In other words, how many months of inventory are available? This is estimated by dividing the number of active listings by the number of sales (and pending sales) in the last month.
There is a simple rule of thumb for reading the market. Having more than six months of inventory on the market means there is more supply than demand (buyer’s market). Having less than six months of inventory means there is more demand than supply (seller’s market). Six months of inventory is considered neutral.
It Can Get Complicated
As you can see, there can be different degrees in a given market. Eleven months of inventory would indicate a stronger buyer’s market than seven months of inventory. Conversely, having only one month of inventory would indicate a more brisk seller’s market than if there were five months of inventory available
Yet other factors also complicate the issue. If you look at the months of inventory available for the whole country, you might find a number that puts us in a buyer’s or seller’s market. But that wouldn’t necessarily apply to every region, or even to every neighborhood within a region. The housing market can be very different from one area to the next. There may be more demand for homes in a popular neighborhood than in its surrounding developments, even though the homes are similar.
How Do Active Adult Communities Fare?
In areas with a diverse mix of home styles (condos, single-family, etc.), certain types of homes may be more in demand than others. In 2009, when home prices dropped significantly, some age-restricted communities held their values better than other areas.
Instead of relying on national real estate headlines, talk to local real estate agents about your specific market. If you are selling, they can estimate how quickly your home may sell in the given market. If you are buying, they can tell you how quickly homes are sold in the neighborhoods you are considering. The market that matters most is the one where you plan to buy or sell your home.