The Difference Between a Buyer's and Seller's Market

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. 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!

A. A full explanation of real estate economics would crash the servers. The short answer is that the number of homes in inventory, which are those actively being offered to the marketplace, reach a point where the amount of time until they are pending sale 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. When the demand fades; however, the homes are still contracted for completion. Large investments have already been made in options, land, planning, and permit. There is natural momentum that affects the resale home market.

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. That 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 the discussion.

Factors Affecting the Real Estate Market

  • Business and commerce
  • Natural causes
  • Financial interest rates or other money supply issues
  • Seasons
  • Immigration and migration

Unpredictable Influencers on the Real Estate Market

  • Fuel prices
  • National money policy
  • Business conditions around the country
  • Interest rates
  • War and natural disasters
  • Generational wealth transfer

One area of the country may be experiencing the exact opposite of another market. According to forum member MiamiCuse, the Florida market is still pretty hot, while in California, it's in the balance area. 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.

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