Whether you've decided to sell your primary residence or you're ready to try your hand at real estate investing, you should have a working knowledge about the real estate market.
Depending on the area, for the past few years, markets favored sellers. While homeowners and investors reaped the benefits, everyone wonders when the market will either swing in more buyers' favor or flatten out altogether.
If you're interested in learning how to gauge the local housing market, read today's post. We'll talk about how to know if it's a buyer's or a seller's market.
The Difference Between Two Markets
Regardless of your motivation, when considering buying or selling a property, you should know the difference between a buyer's and a seller's market. Here's a brief definition of both.
Buyer's markets favor buyers. Buyers benefit from higher home inventory and can typically find plenty of properties at lower prices.
In a seller's market, inventory doesn't satisfy the number of buyers looking for homes. Seller's may raise asking prices, and in many cases, will close the transaction at higher than the listing price.
Tip: If homes in your area remain on the market for 6 months or longer, you're in a buyer's market.
We'll talk more about days on market in a minute, but let's take a look at other ways you can identify whether you're currently in one market or the other.
What Are People Selling in Your Market?
One way you can determine what type of market you're in is to analyze the inventory in your local area. If you pay attention to the news, you'll hear about various hot markets for real estate. Don't get lulled into the hype!
Inventory varies across markets. A hot market in another state, city, or zip code isn't a good gauge for your local level.
When your local market only has enough inventory to sustain 5 months or less worth of sales, you're in a seller's market. If you have over 7 months' worth of inventory, it's a buyer's game.
There's a formula you can apply to this problem of determining local inventory. Find the total inventory in your area and divide it by the number of sales over the last 30 days. If you're not into doing the math, work with a real estate agent who can pull the numbers for you.
Learn about Comparables
Real estate agents do a Comparative Market Analysis (CMA) as part of their regular routine when helping sellers determine asking price. Also called comps, CMAs can help you gain a better feel for market health and help you figure out whether it's a buyer's or seller's market.
Not sure how to pull a CMA together? Your real estate agent can do the work for you and help you understand the different components of CMAs and how they affect you.
Tip: If you notice homes comparable to your property selling at asking price or above, you're likely in a seller's market.
As-Is and Bank Owned Properties
Keep an eye on foreclosure notices, auctions, and listings that indicate a property is a short sale. These are all considered distressed properties and indicate the health of the local real estate market.
For sellers, a high number of distressed properties could result in offers lower than asking price. On the other hand, you may get some fast cash offers, which usually come with less hassle and quicker closings.
In most cases, when you see a high volume of bank-owned, as-is, and short sale listings, it's a buyer's market. If you're a savvy investor or you have some mad remodeling skills, go for it!
Observe Time on Market
Remember, we said we'd circle back and talk about why the length of time a property stays on the market matters.
Days on Market (DOM) indicates the length of time a property stayed on the market before selling. The countdown begins the day a property shows up on the multiple listing service (MLS) and ends when a seller accepts an offer and signs a contract.
You can research how long homes in your area stay on the market either with a short drive around the neighborhood or an online search.
Find the new homes and watch them on one of the online real estate sites. Pay attention to Active and Pending status. When you see a large number of homes move from Active to Pending within days (and sometimes hours) of listing, you're in a seller's market.
Keep an Eye on Trends
It's essential to watch the trends in your local market because, as we mentioned at the beginning of this post, real estate is prone to fluctuation.
When you notice a significant number of sellers reducing their asking price, you may have entered a buyer's market. If you see home prices on the rise, and the continue going up, it's a good indication that sellers will not have a hard time attracting buyers.
When home prices continue increasing but inventory stalls, it often results in bidding wars. A frustrating scenario for a buyer, but bidding wars can mean more money in a seller's pocket on closing day.
Would You Rather Be in a Buyer's or Seller's Market?
Even when it seems like things are going gangbusters, real estate markets do tend to fluctuate. When current trends indicate a strong seller's market (or the opposite), it's difficult to predict exactly how well a specific property, or the market in general, will perform.
When thinking about where you'd rather be on the real estate market continuum, it helps to know why you want to buy or sell.
When you're in a rush to sell, a buyer's market may not feel too friendly.
Investors typically love a buyer's market because they can often close deals at a lower cost than they would if they bid on the same property in a seller's market. Flip the coin, though, and a seller's market may not be the best time to sell an investment property.
Ready to Sell Your Home?
Now that you have a few tools you can use to help gauge the real estate market, you're ready to either plant that for sale sign or start shopping for a new home. Whether it's a buyer's or a seller's market, you'll find plenty of real estate professionals happy to answer questions and point you in the right direction.
If you've enjoyed this post, we'd love for you to keep reading. We've put together a fantastic selection of articles to help you with your buying and selling journey.