Last Updated on May 12, 2023 by Bob Filipczak
A buyers market in real estate means that you, as the buyer, have lots of choice and the ability to negotiate. And let’s be honest, the last time it was a buyers market…well, we don’t even remember. Is it a buyers market right now? Let’s take a look at the current real estate market to see if buyers should be encouraged.
There are a lot of factors that are part of the home buyers market equation. So it makes sense to begin with a definition that lays it all out.
Definition of Real Estate Buyers Market
A buyer’s market happens when there is a great number of homes for sale than there are potential buyers looking to purchase them. This typically leads to lower prices, longer days on the market, and more negotiating power for buyers. That’s simple, straightforward and concise. Let’s dig deeper.
“In a buyer’s market, the power dynamic shifts from the seller to the buyer. Buyers have more choices and more bargaining power.” – Lawrence Yun, Chief Economist, National Association of Realtors
Inventory for a Buyer’s Market
One of the key indicators of a buyer’s market is inventory. When there is a large supply of homes for sale, this increases the inventory of homes on the market. That’s good news for prospective buyers. Additionally, when homes are on the market for a longer period of time, that too helps increase inventory. A rise in foreclosures also adds to inventory. Finally, when builders and contractors are creating more new homes, it helps increase the housing supply.
Current State – Currently the inventory for houses is low. Interest rates slowed down the housing boom that we had during the pandemic, but inventory of houses has not bounced back. In fact, in January, it was at its lowest level in four months (but not as low as during the pandemic). Current foreclosures are also historically low. And with interest rates being what they are, contractors are shying away from residential, single-family housing. All in all, if you want to be hopeful about your buying prospects, don’t look at the low inventory, at least nationally*.
*Real estate trends tend to be very localized, so the inventory in your area may be quite good. Always check with your real estate agent first about the state of the local real estate market.
Real Estate Prices are Stabilizing or Reducing
Another indicator of a buyer’s market is that prices are either stabilizing or reducing. In a seller’s market, prices typically increase due to high demand and limited inventory. However, in a buyer’s market, there are more homes for sale than there are buyers, which can lead to a decrease in prices.
Current State – This might be a good year for housing prices. The predictions of a 20% drop in home prices did not materialize, except in the most expensive locations in bigger cities. On average home prices may drop a small bit, but the overall national average predicts they will rise 3.8% in 2023. Compared to the jacked up prices of the last three or four years, that modest appreciation is great news for buyers. It means you can make good faith offers based on the asking price and not some over-inflated price that results from a bidding war.
Power to Negotiate
One advantage of a buyer’s market is that buyers typically have more negotiating power. With more homes on the market and fewer buyers, sellers may be more willing to negotiate on the price or other terms of the sale.
Current State – Negotiations play a big part in the buying process. Offers and counteroffers can involve a lot of back and forth between buyers, home sellers and their real estate agents. Sellers may be more likely to make concessions and give up more in order to land the right buyer. At least they are more likely than they would have been in 2021. That said, there are still a lot more buyers than there are houses on the market, so it’s probably not yet time to play hardball with sellers.
Contingencies
In a buyer’s market, buyers may also be able to add more contingencies to the contract. For example, a buyer may be able to include a contingency that allows them to back out of the sale if they are unable to sell their current home.
“When buyers hold the upper hand, sellers must be more creative in their marketing and pricing strategies. This may include offering incentives, such as paying for closing costs, or making repairs.” – Jessica Lautz, Vice President, Demographics and Behavioral Insights, National Association of Realtors
Current State – In the current supply-and-demand real estate economy, sellers still have more power in the United States. As a buyer, try to get what you can. Getting sellers to pay for some closing costs used to be easy; now it’s a contingency you will need to fight for. It’s a good time to choose a real estate agent with a good track record in negotiations. Don’t be afraid to ask about their recent wins during contingency negotiations.
Mortgage Interest Rates
You will notice that nowhere in the housing buyers market definition (above) was there any mention of interest rates. Nevertheless interest rates play a significant role in achieving home ownership if you are a buyer. When interest rates are low, it can create a favorable environment for buyers as it can lower the cost of borrowing money for a mortgage. This can increase affordability for buyers, which can drive up demand for homes, even in a market with high inventory.
Low interest rates can also incentivize buyers by increasing competition among buyers. This can lead to multiple offers on a property, which may drive up the price and make it more of a seller’s market.
On the other hand, if interest rates are high, it can have the opposite effect on the housing market. Higher interest rates decrease affordability for buyers, which can lower demand for homes and result in longer days on the market, more negotiating power for buyers, and lower prices.
Current State – Interest rates on mortgages have been on a rollercoaster for 12 months–mostly going up. Last year, 2022, we saw the single highest interest rate jump in 12 months in the history of real estate (from 3.3% to 7%). While 7% is still low historically, it made a lot of buyers very jumpy. This year we have all been watching the rates and the Federal Reserve very closely. It hasn’t been pretty. Just when we think the rates are going to stabilize, the Fed hikes them again to impede inflation.
Tips for Buyers in a Buyer’s Market
If you’re a buyer in a buyer’s market, it’s a good idea to keep these tips in mind:
- Take Your Time – With more homes on the market, it’s important to take your time and not rush into a decision. This can help you find the right home at the right price.
- Know What’s Available – Make sure you know what’s available on the market. This can help you make an informed decision about the type of home you want to buy.
- Analyze the Comps – Look at the comparable homes in the local area to get an idea of what a fair price is for the home you’re interested in. This can help you negotiate a fair price with the seller.
- Watch Days on the Market – Keep an eye on how long homes are on the market. Homes that have been on the market for a longer period of time may be a great deal.
Remember, All Real Estate is Local
We said it earlier, but it bears repeating: all real estate is local. With the exception of interest rates, which are the same everywhere, local markets may look very different two states away. All the factors we mentioned– real estate inventory, prices, contingencies – can be very favorable for buyers depending on where you are. That’s why it’s important to work with a local real estate agent who can help you navigate the market conditions in your area.
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