What makes it a “Buyers Market” or a “Sellers Market”?
Realtors often talk about a Hot or Cold Market, also known as a Buyers Market or Sellers Market – sometimes also a Balanced Market.
We will explore these terms and how they might impact buying or selling decisions.
There are favorable outcomes to be had in these different market types. We will explore how you can use these markets to your advantage regardless of buying or selling.
There are different considerations that go into navigating these different markets and as always, market conditions can change quickly.
Sellers Market aka: a Hot Market
This is an extremely competitive market and more advantageous to the Seller. Oftentimes, homes will sell within the week they are listed, if not the same day they are listed. It is not unheard of for it to sell before the home is listed on the MLS.
Typically, during a hot market, multiple offers will be made on each home and more often than not, homes will sell for more than the asking price. A word of caution here for Buyers, it is possible to end up “upside down” when the Market cools off. Meaning, you owe more against the home than you could sell it for in the next coming years years.
To offset this, ensure you have a strong down payment to establish equity early and make sure you don’t become emotionally invested in winning the “bidding war”. If you are determined that this is the “dream home” make sure that you plan to live in it long enough to build up equity.
As a Buyer in this kind of market, it is critical to be prepared with a pre-approval letter. It can be easy to get caught up in the bid for a home, but if you are prepared (pre-approved, realistic about your needs), it is easier to remain focused on your goals.
Balanced Market
In a balanced market, there is a fairly large number of homes available and an adequate number of buyers. This market does not necessarily favor the buyer or the seller.
A seller may not have as many offers on their home, but he or she may not be willing to undercut the competition either.
As always, it is in the the Buyers best interest to be prepared with a pre-approval letter. During a normal market, the chances to negotiate are higher than in a hot market. As a buyer, you can expect to make offers at lower than the asking price and negotiate a price at least somewhat less than what the sellers is asking.
Buyers Market aka: Cold Market
In a cold market, houses may be listed for more than a year and the prices of houses listed may drop considerably. Often times Sellers are expected to make a price cut (or two) before they will receive an offer.
This type of market is more advantageous to the Buyer than Seller. However, interest rates in this market tend to be higher as opposed to a Hot Market where buyers are determined to buy a house, wanting to lock in a lower rate. As a buyer, you have the time and space to make an offer. It is not uncommon to low-ball and to find that sellers are accommodating to your offer price.
Historical Interest Rates
As you can see by the graphic, the Federal Reserve (FED) has charged different rates to influence the Real Estate Market. To quickly summarize the way the FED and Mortgage Providers work- The FED charges a base interest rate to loan to the mortgage provider, then the mortgage provider adds a percentage on top of that amount and offers it to the Buyer. For example, the FED charges 4% interest to the mortgage provider, who in turn adds 2% interest, and offers mortgages at 6% to Mr. Joe Buyer.
Historical Housing Prices
As you can see by the US Housing Prices graphic, you will see a pattern between the FED rate charged and US Housing prices. When the market starts to heat up too much the FED charges a higher interest rate to try and “cool” the market. When the market cools too much the FED lowers the rate to encourage buying.
Navigating Cool Market Conditions
As a Seller in a cool market you must present your property in the best possible light to the largest potential buyer pool. Meaning deep-cleaning, staging, neutral paint colors, neutral smells, and spectacular photos. Aggressive marketing and flexible negotiation are required.
As a Buyer in this market, you do not want to lose your dream home by being unrealistic. Your goal is to get your dream home at the best possible price. Insulting the Seller with a perceived “outrageously low offer price” may remove your offer from consideration altogether.
Navigating Hot Market Conditions
As a Seller having a clean, staged, attractive, well presented home means offers above your asking price. Sure, you could list it “as is” and get a full price offer that same day. But arguably, wouldn’t it be better to get 5 offers and ~$10k above your asking price within the week? Regardless of the market type, presentation always matters.
As a Buyer in this market, you do not want to ultimately lose your dream home by being unrealistic. Meaning, yes you won the home and are now upside down. It is difficult to maintain the payments for it and you are what many call “house broke”. Ultimately, don’t over extend yourself making an above asking price offer that is certainly accepted, but difficult to maintain for years to come. It is a sad day when a buyer will offer well over asking price to win the house, and be upside down in it for many years to come.
Have ever sold or traded in a used car? Don’t you clean it and put it through the wash – anticipating the best possible price for it?
Further, if a cute little girl was selling girl-scout cookies, and started pulling them out of her pockets un-wrapped with lint all over them, would they still be as attractive as the green and yellow boxes we all know and crave?If corporations will spend, literally thousands of dollars to sell a $12 cheeseburger, how much more should you invest in selling your property for the best possible price?
I digress.
Navigating Hot Market Conditions
Regardless of market conditions, make sure you have a well educated and prepared Realtor on your side. Every Buyer and Seller need competent representation; homeownership is a big investment and should be treated with the respect deserving of that achievement.