The number one question I get asked is “how’s the market?” The number two question I get asked all the time about buyers or sellers markets; which one we are in, how that will affect the individual asking the question, what it means, etc…
So, today let's cover what they are, and what they can mean for buyers and sellers.
Before we get into what these two markets are it important to understand the law of supply and demand. Just like in physics, business has principles which govern how things work, within that field; we call them laws. They are called laws because it is always true, and the few times it has not been true, the business has failed.
The law of supply and demand states that when demand is low, supply will be high, and value will go down. When demand is high supply will be low and value will go up. Value is represented in the price. It works because a manufacturer can only make so much of a product, and a company will order a certain amount of the product based on predictions from past trends. Lets take for example, phone X. Company A orders 100 of phone X from Manufacturing S and sells it for $50 each, but only 10 people buy it. Now the company has 90 phone X left in storage taking up space and putting a dent in money being made back from what they spent ordering the first 100. So, company A waits a few months and says, we can either throw these out and take a complete loss, or we can sell the rest of these for $20 and at least make some money back. So, they lower the price and sell them off quickly at the huge discount to the buyer and a loss to the company. A year goes by, and manufacturing S says hey we have a new Phone Z we’ve made. Company A says to themselves, the last time we bought a lot of phones no one wanted them, and we barely made money back on them. We know people use phones a lot though, so let's get 50 of them. This time they start selling them for $30. The new phone and the lower price drive demand for it up and so pretty soon company A sells out. They reorder 50 more phones from manufacturing S and raise the price to $40. Now people are still buying Phone Z, but not as quickly because the price is a bit higher and so demand as gone down because people are priced out.
If company A had kept the price at $30, the demand would have stayed up until everyone had one and the market was what we call saturated, had company A priced the phone Z at $50 again like they had with phone X the demand would have dropped, and they would not have sold any. Now the company knows that $40 is the value of the phone and that will keep the supply and demand even.
OK enough with the business lesson. Now that we understand the law of supply and demand, we can talk about what that has to do with buyer and seller markets.
Sellers Market
Simply put, a sellers market is when there are more buyers trying to buy houses than there are houses available to be bought, making it market ideal for sellers.
What does this mean?
Because of the high number of buyers and lack of houses available, the demand for the few homes available is high. In our phone example it was easy for the company to call the manufacturer and order more phones, so they did, and were able to meet the demand expectations, but homes are different. It takes 6-8 months if not more to build a new home, and 7-15 years before the average owner decides to sell their home. Which means that if it’s a sellers market, it could take a long time for that market to switch.
If you can’t increase the supply, the demand grows exponentially. The people who wanted a home last year but didn’t get one still want one, but in addition there are all the new people from this year who want a home now too, so this means that this market can swing in that direction very quickly and take a long time to swing back in the other direction.
How does this affect the market?
Sellers and builders know that for every one house they have there are 15 or more buyers ready to do anything to get their hands on one of the very few homes available and that among those buyers is at least one who is willing to jump through any hoop and meat any request in order to get it because they can’t get it anywhere else. When demand grows so does value. So, sellers increase the requests: raise the price, reduce acceptable financing options, exclude inspections, pass off any updates or remodels as the buyers’ responsibility, and they will continue to do it as long as they can, because that’s good business.
Buyers know that for every home they see, there are 15 or more other buyers competing with them to win the home. They will submit offers immediately, offer above asking, ask family to help offer cash, waive inspections, sometimes even buy the home sight unseen in order to make sure that they have a better offer in before anyone else.
Buyers Market
This is the complete opposite of a sellers market. When there are more homes available for sale than there are buyers ready to buy making the market perfect for buyers.
What does this mean?
Because of the high supply of homes and lack of buyers interested, the demand for home goes down. In our phone example the company decided to cut its losses and sell the phones below value because they needed to make room for new products so that they could continue to make money and stay in business, but homes are not something that people always need to sell right away. Owners would rather wait until demand goes up again or their need to sell become bigger before they decide to sell below what they believe their home is worth. However, job changes, birth, and death all continue to happen and those who do need to sell find themselves needing to lower the price in order to meet what buyers are willing to pay.
How does this affect the market?
Buyers will take their time and look at 20 or more homes before putting in any offers. They will only put in offers on what they consider the perfect home meeting every requirement they have for look, style, locations, convenience, and price. They will submit offers below asking, opt in for every inspection to be done and require repairs and updates to be taken care of by the seller, and they will continue to do it as long as they can, because that’s good business.
Homes will sit on the market for a very long time waiting for the one buyer who wants a home just like theirs to put in an offer. Sellers will lower prices and do complete remodels or update the entire home to help incentivize buyers and meet more of their requirements. Sellers who need to sell will do anything they can to sell the home in some cases even accepting a loss on the investment.
Todays Market
We are currently in a sellers market, and from what I understand it's one of the longest sellers markets we’ve seen in a long time. We have been in a sellers market since 2020. Between the rush to leave the city or apartment living during the pandemic, the increase in prices across the board from building materials, to land, cost of doing business, and everything else that would affect the price of a home, lack of people looking to sell their home, and supply chains being disrupted on a global level, it has a created a perfect storm for a sellers market. The rise in mortgage rates was partially to help balance out the market higher rates mean that builders and sellers can’t have unlimited power in dictating the value of the home and it's also part of the reason it hasn’t come down, but they can't continue to rely on that forever hence the rates coming back down again.
The things that will help change this market:
1. National and International supply chains being restored in order for more builders to enter this market and for them all to get materials delivered within a reasonable amount of time for a reasonable price.
2. The inevitable passing of older generations. The baby boomer generation had 76 million births, Generation X 55 million, Millennial generation 62 million, Generation Z 69 million, and Generation Alpha is currently at 2.8 million and closing out in the next year. The Baby boomer generation is currently passing, which is freeing up available real estate, but because of the high prices on homes, they are choosing to stay in their current homes until they pass rather than selling and moving to retirement communities, so sales are happening at a slow enough rate that it is not helping to combat the other factors affecting the market. As these older generations pass, it will free up available homes and land for the markets will change again.
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