Written by Robert H. Ruth
If you are about to start looking for a home this Spring, you may come upon these terms. Beyond a simple definition for each of these, it is very important to know the different factors that define each, and how the different markets can impact a buyer. This article will examine all these areas.
Buyer’s Market Defined
A buyer’s market exists when there are not enough buyers looking to purchase houses, and thus there is an excess of available inventory (homes for sale) on the market. Stated differently, there are more homes on the market than there are buyers who are seeking to buy them. In this type of market, prices are highly negotiable, price appreciation is very slight, or even nonexistent, and homes take a long time to go under contract and close.
In a Buyer’s Market the Following Occurs:
- Large amount of housing inventory on the market ( greater than 6 months)
- Houses take longer to sell, and when they do, often sell below asking price
- Buyers have the ability to set very favorable terms in a negotiation, and can frequently get the seller to pay closing costs and points on their mortgage
- Sellers are willing to accept a buyer’s offer that is contingent upon selling an existing home before closing
- Sellers will accept a mortgage pre-qualification letter with an offer
- Median home prices are trending down
If you are looking to purchase a home in a buyer’s market you will likely have a more enjoyable experience, because as the consumer, you have more power than the seller. This allows you to set the terms that are the most favorable to you for financing the home, and you will have a greater ability to negotiate the price. You will be able to pick from many homes on the market in your price range because there is an excess of inventory, in many instances across all price ranges. First time buyers also have more leverage because of the greater numbers of properties available.
Seller’s Market Defined
A seller’s market exists when there are many more buyers seeking to purchase than there are homes available on the market. Stated differently, there are less houses available to satisfy a larger pool of buyers in the marketplace. This lack of listing inventory leads to rapid (at times excessive) price appreciation, very quick closings, many cash buyers, and the presence of bidding wars for properties.
In a Seller’s Market the Following Occurs:
Much less housing inventory on the market ( usually 4 months or less )
- Houses sell very quickly, and in many cases sell above the asking price
- Sellers wield the most power in a negotiation, with very few concessions needed to move a property
- Sellers reject offers that are contingent upon the sale of an existing home
- Sellers prefer a mortgage pre-approval letter, and might ask buyers to provide proof of finances available for the transaction.
- Presence of bidding wars between buyers
- Median home prices are rising, often rapidly
If you are looking to buy a home in a seller’s market, you might not enjoy the experience as much, because as the consumer, you are at a disadvantage versus the seller. You will not be able to set the terms in a price negotiation or for financing, and if you get in a bidding war your bid will not be accepted unless it is the highest. As a buyer you may have to settle for less than what you had hoped for due to the rapidly escalating prices in the market. First time buyers could have a very frustrating time successfully navigating a seller’s market.
- The best way to navigate in either of these markets is to be honest with yourself about how much you can afford each month for a mortgage payment and stick to that number.
- It is vital that you get pre-qualified before starting to search for any type of home purchase, and if you have past credit issues, or have switched jobs frequently, or are self-employed, it makes sense to get pre-approved so you are absolutely certain you will get the financing.
- You also should know exactly how much closing costs will be so that you can determine if you have enough money for the transaction and reserve funds available in the bank after closing.