Q. Would someone please explain to me what determines a "buyer's market" and a "seller's market"? We always hear the news of the housing boom busting, and now we hear more homeowners are putting their houses on the market than there are new homes being built, but what does that mean? Thank you!
spark71
A. A full explanation of real estate economics would crash the servers.
Short answer: The number of homes in "inventory" (actively being offered to the marketplace) reach a point where the amount of time until they are pending sale (shelf life, or if you are in the biz, days on market) determines whether it is a buyer's market, seller's market or balanced market. (Typically, this analysis is also split into new and resale homes, accompanied by many other subsets.)
New homes have a pretty strong effect because the industry tends to be reactionary; when demand appears, new homes begin to sprout like wildflowers (or weeds, depending upon who you ask). When the demand fades, however, the homes are still contracted for completion. Large investments have already been made in options, land, planning and permit fees, etc., so there is a sort of natural momentum that affects the resale home market for a while.
Investors and speculators get involved during a hot market. They are the first to hang signs out front when they sniff the end of the fun times, which creates a sudden jump in inventory, and makes everyone nervous. While not severe, normally it will create a herd mentality.
It's basic supply versus demand. If there are a lot of interested buyers for a limited number of available homes, then it is a seller's market. This is because sellers will find that they have a lot of interested buyers approaching them, giving the seller an upper hand in negotiating the price and conditions of the sale. Conversely, if there are quite a lot of homes available in inventory, and only a limited number of people looking to buy in the area, then the negotiating leverage switches towards the buyer.
Supposedly, there is a balance point, but it is more of a theoretical number for economists to play with, and realistically, the balance point is something that the market passes through while cycling from one type of market to the next. (Cycles are a constant part of this discussion, but again, you could spend all day just discussing those.)
There are many factors that affect the market for homes. Here's a few:
• Business and commerce
• Natural causes
• Financial interest rates or other money supply issues
• Seasons
• Immigration and migration
Anyway, the Fed's better understanding of how our money system works has settled down the severity of the cycle a little during this current shift away from the seller's favor, giving the change a "soft landing" tag. The primary reason for this is that interest rates have remained relatively flat and stable.
Current wild cards affecting the real estate market include:
• Fuel prices, because a significant rise in the price affects a lot more than the favorite of your local news, the guys at the gas pump. Petroleum is used throughout our country for commerce, agriculture and consumer needs. A sudden jump in oil prices could jumpstart an inflationary trend.
• National money policy
• Business conditions around the country, because laid-off people don't buy homes
• Interest rates
• War and natural disasters
• Generational wealth transfer, which is heading to its highest level
One area of the country may be experiencing the exact opposite of another market. According to MiamiCuse (forum member), the Florida market is still pretty hot, while here in California, it's in that balance area generally (shifting from red hot to... well, we don't know yet do we?). People tend to ignore the fact that double-digit appreciation is not the norm, and when it becomes only single digit they start to fret. Statistical relativity is another concept that gets pretty deep.
Glad to help,
AFineFix
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