buyers market
Buying, Finance, First Time Home Buyer's Guide, Home Values, Local Market Report, Selling a Home

Four Signs that a Buyers’ Market is Coming

Although markets are constantly changing due to the effects from mortgage rates, inventory, or even the seasonality in which you buy or sell, these are four signs you should look out for if you’re looking to buy.

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Since February 2012, home prices have been rising at an accelerating pace, fueled by a combination of extraordinary demand and inadequate supplies of homes for sale. Over the past year, prices have been rising faster than incomes, reaching an annualized rate of nearly 7% a year. Median prices in more than half the nation’s housing markets had reached all-time highs. Now, sales are lagging and prices are rising at much slower rates. Fundamental changes are underway in the real estate economy that should bring a degree of relief to the record-breaking millions of millennial first-time buyers who are struggling to save enough for a down payment.

The laws of supply and demand govern real estate markets. High levels of demand deplete supplies and prices rise until homes become too expensive for average buyers, and demand declines. High prices also encourage sellers to list their homes and builders to build new ones. Supplies increase until prices moderate and decline. Buyers’ markets occur when the supply of available properties for sale exceeds demand (the number of buyers actively shopping for properties). Sellers’ markets occur when demand exceeds the supply of available homes on the market.

In sellers’ markets, homes sell faster and for prices at fair market value or higher. Often, more than one buyer will make an offer, creating a multi-bid situation where buyers may raise their offers to win the contract. In buyers’ markets, houses take longer to sell and sellers may decide to settle for offers below list price. Sellers may offer incentives, such as including a home warranty insurance policy that covers appliances and systems like air conditioning at the time of sale.

Buyers’ Markets Are Inevitable

Real estate markets are cyclical. Even the longest sellers or buyers’ market will eventually end as demand, price, and supplies change. Over the past year, the laws of supply and demand have been at work, changing the dynamics of hundreds of housing markets. Prices in half the nation’s markets have reached peak heights, and they continue to increase in most markets, albeit at a slower pace than last year. Sales began sagging 18 months ago, then stabilized recently as more buyers became active to take advantage of lower interest rates.

Most markets today favor sellers. However, many are in the early stages of becoming buyers’ markets and your market is probably one of them. Eventually, your market will make that transition. With the help of your real estate agent, who has access to local data from your local multiple listing service or other sources that are not readily available to consumers, you can read the signals in your market data that professionals use to anticipate the change before it occurs.

When using real estate data to track market trends, be careful to account for seasonality. Prices, sales volume, inventories and the time it takes to sell a home all change with the seasons. Spring and summer months are traditionally more active and, on a month-to-month basis sales will usually rise, and supplies will probably decline during the warmer months. That’s why real estate economists compare data on a year-to-year basis, or they will adjust monthly data using a formula to account for seasonality.

buyers market

Here are four signs that decipher the direction in which your market is headed:

  1. Houses take longer to sell. The time that passes from the day a home is listed for sale and the day a seller accepts an offer is an excellent indicator of demand. When demand is weakening, houses in a market will sell less quickly than they were selling a year ago. Demand can be measured by days on-site, the time that has passed since the home was listed on a web site like Homes.com or days on market, the number of days since the home was listed on the local multiple listing service. To express the effect of demand on the domestic supply of homes for sale in a particular market, some economists prefer months’ supply―the number of months that it would take to deplete the local inventory of homes for sale at the current rate sales.

There is no specific definition for buyers’ and sellers’ markets in terms of time on market, but generally, the average listing time is 46 to 55 days. By itself, time to sell a home is not enough to define a buyers or sellers’ market. However, a lengthy time on market during the fall and winter months is a sure sign of a buyers’ market. When a listing takes six weeks or less to sell in the spring or summer, you are probably in a sellers’ market. By comparing changes in the time on market over the past two or three years, you can identify trends and get good sense of whether conditions are improving for buyers or sellers.

  1. Sales slow down as demand drops. Home sales quickly reflect changing supply and demand. When sales decline from levels of a year ago over a period of several months, it’s a reflection of either falling demand or low levels of inventory. Demand may fall for one or more reasons ranging from consumer confidence in the economy, changes in mortgage rates, or price increases that exceed what local buyers can afford.

Your agent should be able to provide you with monthly data on local sales trends in the form of closings and contracts or pending sales. Though about 15% of contracts fail to close, pending sales are an indicator of future sales trends.

  1. Prices appreciate at rates lower than 3%. Prices reflect changes in the relationship between supply and demand. Prices rise in a sellers’ market and are flat or trend down in a buyers’ market. As a rule of thumb, residential real estate appreciates about 3% in a typical year. In July 2019, home prices rose 4.3% over 2018, suggesting that we are still in a sellers’ market, but less so than in July 2018, when prices were 6.9% higher than in 2017. If price appreciation falls below 3% next year, it’s a sign than a buyers’ market is here. To get a sense of recent price trends, ask your real estate agent for a graph illustrating price trends in your market over the past three years.
  2. Supplies of homes for sale exceed demand. When inventories of affordable homes fell so low that they started to hamper sales, many housing economists were caught off guard. By 2017, the month’s supply of available homes for sale in the nation’s largest markets had declined 25% over the preceding two years. Inventories continued to fall quickly, until the point that the lack of affordable homes for sale was making the problem even worse by pushing prices up so high that middle-class homeowners in many markets could not find move-up homes which would free up the houses in which they were living for first-time buyers. By late 2017, the first signs of relief appeared in hotter markets. On a year-over-year basis, new listings started to improve, and supplies of active listings stopped shrinking every month.

Several factors contributed to the inventory drought: low levels of new home construction, the conversion of 7 million homes from ownership to rental, move-up buyers who could not afford the move up, and above all, the coming of age of the largest generation of prospective homebuyers in history― the millennials.

Inventory shortages may be the most destructive cause of home price inflation. When supplies cannot meet the demand, buyers find themselves bidding against each other for a house they can afford. By the time the bidding ends, winners often turn out to be the real losers because they have stretched their budgets to the maximum. Also, shortages can creep up on buyers and their agents if they are not following market reports carefully which will artificially drive up prices.

The nation’s housing markets have not recovered from the inventory drought. The relationship between prices and inventories is very delicate. For example, in June 2019 demand improved when mortgage interest rates fell unexpectedly. Many buyers became active to take advantage of the rates. With demand up, inventories fell slightly below levels of a year ago. Should rates continue to rise, demand will return to its slow decline.

Pay attention to inventories and new listings in your market. Your market with not make the transition from sellers to buyers’ market until supplies of homes for sale outnumber sales on a monthly basis.

Markets do not change quickly from sellers’ to buyers’ or vice versa. The process is a slow one, giving you time to prepare. If you are a potential seller, you can track these trends to help you decide when to sell in advance of a changeover. If you are a buyer, particularly a first-time buyer, get your ducks (credit score, down payment) in a row so that you will be ready when the market turns in your favor.

 

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Steve Cook is the editor of the Down Payment Report and provides public relations consulting services to leading companies and non-profits in residential real estate and housing finance. He has been vice president of public affairs for the National Association of Realtors, senior vice president of Edelman Worldwide and press secretary to two members of Congress.

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