If you’re looking to buy a home, then you should know that the market experiences waves. Sometimes it’s more favorable for first-time homebuyers, and other times sellers have an advantage. Wrapping your head around all the possibilities may be intimidating, but the better you understand the housing market, the better off you’ll be when it’s time to make an offer and negotiate a deal.
What Is a Buyer’s Market?
When supply outweighs demand and there are more homes for sale than there are buyers, it’s called a buyer’s market. When sellers have to compete for buyers, they usually are more receptive to lower offers or bids that include contingencies protecting the buyer. A buyer’s market also means you’ll face less competition from other buyers, which gives you more time and leverage to negotiate the best price on a home and the best overall deal.
What Is a Seller’s Market?
When demand outweighs supply and there are more buyers than available homes, it’s called a seller’s market. When buyers compete for a limited number of available homes, sellers often receive multiple bids and can choose offers with the highest price and fewest contingencies. Buyers anxious to land a home can get caught up in a bidding war, scrambling to quickly submit an offer that stands out. Sellers, meanwhile, are less motivated to negotiate because buyers are more willing to make offers that accommodate the seller’s needs and wants.
What Is a Balanced Market?
In a balanced market, the number of buyers is roughly equal to the number of available properties. In other words, supply meets demand, and neither the buyer nor the seller has a clear advantage. Buyers have less competition, so they don’t need to make excessive offers to stand out, but there are enough interested buyers that sellers don’t need to reduce their asking price. Homes typically sell at or around asking price in a balanced market.
Understanding Market Cycles
There are a number of economic factors that drive change in the real estate market.
Overall economic conditions
If the economy is hot and unemployment is low, more people may have the resources to make a down payment, get a loan from a mortgage lender, and buy a home. That increases demand for homes, and it may mean more competition if the number of buyers starts to exceed the number of available homes.
Interest rates
When interest rates are low, it costs less to borrow money and take out a mortgage. That means more people can afford to buy a home, which drives up prices.
When interest rates are high, a mortgage becomes more expensive, and fewer people can afford to buy a home. That decreases demand, and prices typically decline.
For example, during the height of the COVID-19 pandemic, interest rates fell to record lows and home prices increased dramatically. But when interest rates increased to reduce inflation, demand for homes fell, and home prices followed suit.
National vs. local markets
National trends may not always reflect what’s going on in local markets. Conditions specific to a certain state, city, or neighborhood often run counter to the overall picture. Make sure to separate the two if you’re looking to buy in a particular location. If buyers are flocking to — or away from — that area, it’s going to have a big impact on the price of available homes.
How the Market Affects Sales Negotiations
Real estate market conditions affect both how much home you can afford and how good of a deal you’re able to negotiate.
In a buyer’s market
In a buyer’s market, you have more leverage to negotiate. A seller eager to close a deal may accept an offer that’s lower than the listing price. They also may be more willing to accept contingencies.
In a seller’s market
In a seller’s market, the buyer has more competition and less room to negotiate. To beat out other bids, you may need to offer more than the listing price. You also may need to ask for fewer contingencies that could let you back out of a deal.
In a balanced market
In a balanced market, neither the buyer nor the seller has an advantage, so neither party can realistically ask for too much. As a result, there’s less back-and-forth negotiation, and homes often sell for the listing price.
Lessons From the Housing Market Crash
During the 2008 financial crisis, housing prices collapsed when many homeowners were unable to afford their subprime mortgages after interest rates adjusted upward. According to the Federal Reserve Bank of Chicago, there were about 3.8 million foreclosures between 2007 and 2010.
Another result was that property values plummeted across the country. In March 2007, the median sales prices for a new home was $262,600. By March 2009, that number had dropped to $205,100 — a difference of $57,500, or roughly 22%. Many who were able to keep their homes suddenly owed more on their mortgage than their home was worth.
Financial regulations were passed that increased how much capital lenders are required to keep on hand, and the Dodd-Frank Act prohibited deceptive lending practices and established the Consumer Financial Protection Bureau to help ensure mortgage customers are treated fairly.
FAQ
Here are answers to some frequently asked questions about the housing market.
