It has been just a decade since the real estate market crash of 2008 that almost took with it the entire global economy, and to say the least, the market is not in its best shape. The real estate market may be gradually improving but we are still in a position where property owners selling have been forced to do almost everything they can to try and attract buyers for their homes.
What is a Seller’s Market?
Simply put, a seller’s market in real estate occurs when there is a higher demand for homes or other property compared to the available supply. The opposite, ‘buyer’s market‘, is when the supply of homes and properties in a market is greater than the demand. In a seller’s market, conditions favor the seller while the market favors the buyer in a ‘buyer’s market’.
Now, a large portion of the US real estate market is in the seller’s market having recovered from the 2008 real estate crash. Home and property prices are on an upward climb in 20 of the largest cities, the inventory is tight, and the sky rocketing costs of construction isn’t helping the situation.
How do you tell that you are in a seller’s market?
During the seller’s market phase, the ratio of property sales to that of listing hits 55 to 60 or roughly three property sales for every five listings. A seller’s market is the opposite of buyer’s market which happens when there are more property listings (supply) compared to demand. In such a situation, the ratio of property sales to that of listings is about 7 to 20, or 35 per cent.
Here are three of the most important variables you can analyze to determine whether you are in a buyer’s or seller’s market:
- Asking vs. final property price: If bidding wars erupt when a property is put on the market, it is a definite indication that the property is in the seller’s market. In a seller’s market, the seller will often enjoy a final sale price that is equal to or higher than their asking price.
- Property’s average days on the market (DOM): This is the median age of real estate listings in the area. If properties are being listed and sold within 10 days, it is a clear sign that the area is in the seller’s market.
- Track property prices over time: Graphs never lie, especially in the real estate market where the market rarely ever makes and overnight turn. You can easily find out the real estate market status of a city or neighborhood by looking at the real estate market price curve online.
It is important to note that the state of ‘seller’s market’ is not a universal or countrywide state of the real estate market; this often defines a specific market such as a city’s real estate market or the state of the market in a neighborhood.
What Does Low Inventory Mean?
In a seller’s market, the number of properties listed is often lower than the properties in demand. In a situation where there is a shortage of properties available, buyers compete for the few homes listed in the market and they will often find creative ways to make their offers more attractive than to the seller than the competition. In a low inventory market, buyers recognize the limited options available, forcing the market deeper into the seller’s domain.
The number of listings in the real estate market is not constant throughout the year; during the start of the year before buyers begin the buying process, the market is often saturated with sale listings that only drop in number when the actual buying season begins after fall.
Based on statistics from real estate listings websites, there is often an increased traffic to their websites at the beginning of the year when the house and property hunting begins and begins to drop off towards the middle of the year. You would therefore expect the periods between April and October to be ‘low inventory’ in a typical real estate market.
Does Tight Inventory Favor Sellers?
In a seller’s market, the seller basically sets the terms of the sale of the property because there is a higher demand for the property than the market can supply. In a typical property sale situation, the buyer would request that the seller meets certain conditions such as fixing a few things in the home or replacing fixtures and appliances before the sale is closed.
Since the seller has many buyers to choose from in a seller’s market, the property will most likely go to the buyer demanding the least concessions with the highest buying price offer. It is justifiable to say that a tight or low inventory best suits the seller because the buyers compete for the limited properties in supply and will be willing to compromise on any minor flaws in the property that would otherwise make the seller to consider the next seller if they are asked to fix.
Based on analysis on real state data, there is expected to be far more buyers of homes and properties from 2018 through 2019 compared to property listings. This is compounded by the fact that properties are selling much faster now – properties staying on the market for a median of 73 days countrywide. Worse still, most buyers have learned that waiting until fall when most buyers will have closed their deals with hope to score a bargain often results in slim pickings.
Can “Buyers Panic” lead to fast sales?
In a seller’s market properties certainly sell faster than during other times. In this situation when the inventory is low and a large number of buyers are shopping for properties, it is not uncommon for buyers to trip over themselves trying to get a hold of the few listed properties in the market.
Tight bidding wars among buyers often trigger what is known as ‘buyer’s panic’. This is a situation when buyers are willing to go the extra mile to outdo the competition in bidding for a property, even if it means overlooking various property features they consider important or even pay more than they planned to just to avoid missing out on the listed properties.
Buyer’s panic is often a contagious condition that once it starts, it spread among buyers and even real estate markets. This benefits the sellers the most because they will not only have more offers to choose from, they also stand to get offers higher than the listing price and they get to set the terms of the sale. Because the seller has the power to determine to whom they will sell the property based on set terms, and how soon the buyer intends to make the down payment, properties sell faster when buyers are in a panic to buy available listings before they miss out.
Are cash investors making a tight market tighter?
Unlike in the past when the market had only the genuine real estate investors who valued the integrity of the market and the importance of supply and demand, today the market has investors of all kinds. From new money-focused contractors buying properties for subdivision and resale to briefcase companies that buy houses on a buyer’s market to ‘flip’ when the market turns, this new wave of investors that typically pays all cash is having a catastrophic effect on the already tight market.
There is little chance that a prospective homeowner that is relying on a mortgage can outbid an investor willing to pay cash with intention to sell at a higher price in the near future. Because of this, these investors are buying up lots of properties meant for individual homeowners, forcing them to compete on the remaining few properties in a seller’s market. Unlike individual buyers, these investors often have ready cash and do not have to deal with the hurdles of finding a lender, placing them in the best position to quickly acquire and move the property.
From the seller’s perspective, an investor with ready cash is a preferable sale even when the price is slightly lower than what an individual with mortgage papers can offer. This is because the property will move fast, and because most investors buy properties to add value before selling, most will not make demands or ask for concessions before closing the sell deal. This makes them a property seller’s dream.
Low Interest causing a seller’s market?
Well qualified buyers currently enjoy interest rates of just over 4 percent on home mortgages. The Mortgage Bankers Association anticipates that while interest rates are unlikely to spike any time soon, it will steadily rise throughout the year, with 30-year fixed rate mortgages likely to reach 4.6 per cent by the end of 2018, 5.0 per cent in 2019, and up to 5.3 per cent in 2020. Basic real estate laws say that the best time to invest in property is now to lock in the low interest rates and ultimately spend less on a home or property.
The fact that the current interest rates are probably the most favorable a seller will get in the foreseeable future and considering that industry experts are predicting that these rates will begin rising within a few months, every buyer looking forward to getting a loan to purchase a house or property will be rushing to get it before the rates change. This sense of urgency is the very same we talked about before that may cause buyer’s panic and ultimately turn the market to favor the seller.
The drop in real estate mortgage rates is one of the top causes of a seller’s market. This is because the reduction in loans interest rates qualified more people to purchase homes and properties, or to afford more expensive properties that they would otherwise not afford. The steeper competition that favors the seller arises because the higher number of prospective buyers will have to compete for the limited number of properties in the market.
A New Set of Buyers Enters the Market
Population growth and the increase in employment opportunities are listed as the next most significant conditions that cause seller’s market in real estate. With millennials growing into adults, and the job market stabilizing, the number of potential buyers looking to purchase the limited number of properties will only go higher, tightening the already tight market and driving property prices higher.
Millennials are rising with the information age, and with a new form of economy that pays more, millennials are expected to be in better positions to commit to buying property than their predecessors. However, considering that this same generation is saddled with student loans and with an erratic job market being taken over by the robots, the impact of the generation’s entry into the real estate market will most likely favor real estate sellers than buyers. Older millennials approaching their 30s, currently employed or in business, are beginning to settle down and are responsible for the sustained demand of new homes
There are just too many variables that influence the dynamics of a seller’s market – from tight inventory and low mortgage interest rates to buyers’ shopping habits and societal change. Whether you are looking to sell or buy a home or property and are weighing all the factors that should affect your decision of ‘when’, the points covered in this post should form the basis of your real estate market research.
Call The Wright Choice Team today at 804-307-2589 to tour available homes for sale in the Chesterfield County area.