If you’re thinking about buying or selling a house soon, you’ve likely heard talk of “buyers’ markets” and “sellers’ markets.” Simply put, a buyers’ market occurs when there are more homes for sale than available buyers. Conversely, in a sellers’ market, demand outstrips supply.
In 2013, should the fragile housing recovery proceed as most experts expect, we could see a handful of markets cross over the line from buyers’ markets to sellers’ markets. A number of things about the way homes are bought and sold could change as a result, and it’s worth reviewing some of them, as it’s been six years or more since most real estate consumers encountered sellers’ markets.
When buyers’ markets return to sellers’ markets, the gap between sellers’ asking prices and final sales prices shrink—and may diminish altogether.
Normally, sellers’ markets are created by increased demand. However, today’s real estate economy is acting very differently than normal. Severely declining inventories, rather than rising demand, are driving the recovery. It’s harder for low inventories to maintain the recovery, which is why most experts characterize the current situation as unstable. However, low inventories can create sellers’ markets just as quickly as high demand.
Here are some signs of sellers’ markets that haven’t been seen for several years (and for which to keep an eye out in 2013):
No incentives to attract buyers. When sellers are in charge, they’re not going to spend any more than they have to in order to attract buyers. Sellers may no longer be offering reduced sales prices, paying a portion of closing costs, making repairs, or offering home warranties, all of which are popular incentives that have been used recently to entice buyers.
Pressure on real estate commissions. There is no such thing as a standard real estate commission. The percentages that sellers pay their brokers are negotiable, and in a sellers’ market, the seller has the upper hand. Options like minimum service brokerages that simply list homes on the MLS for a fee, or fee-for-service brokerages, are popular during sellers’ markets. Both listing agents and buyers’ agents feel the pressure during sellers’ markets.
More homes are sold FSBO. More sellers tend to go FSBO (For Sale by Owner) in sellers’ markets, when it’s much easier to attract buyers. They’d rather not pay for professional help that they may not need. Real estate professionals counter that FSBO homes take longer to sell and sell for less than non-FSBO homes. Last year, at the bottom of the housing crash, only 9 percent of recent sellers reported selling their homes as a FSBO. In 2003, the FSBO market share was 14 percent. In 2006-2007, at the height of the housing boom, owners sold 12 percent of homes, according to the National Association of Realtors.
All cash or pre-approval. Buyers without either cash or a pre-approval letter from their lender won’t get in the door with a seller. Slightly more than half of buyers are getting approved for a purchase mortgage these days. Why should sellers take a chance on a buyer who might be wasting their time when there are others who are financially prepared? Don’t house hunt beyond your computer screen until you’re pre-approved. What will you do if you see the house of your dreams and you’re not ready to make a serious offer?
With offers, the devil is in the details. Offers, which are contracts that include the buyer’s written proposal, are more than a price. Real estate lore is full of stories about buyers who made the highest offer but lost out on a home they loved because of something that seemed like a detail at the time. Sometimes it works the other way. My wife and I won our current house over a dozen others when we agreed to let the owner rent back for two months. Sometimes you can make concessions that signal your willingness to deal, or you can increase your deposit to show that you are serious.
Inventory heaven. Higher prices result in more listings. Inventories have been slim in the past two years because sellers have been waiting years for the right price. In a sellers’ market, buyers may be overwhelmed by options on their favorite listing sites, and they’ll find house hunting can be a full-time job.
Low appraisals. One of the downsides of a sellers’ market is the tendency for appraisers to undervalue a property. This happens more frequently when prices in a local market have been rising quickly and appraisers may use comparable transactions that took place months before that don’t reflect the latest price trends. Low appraisals can be a nightmare for buyers, who risk losing the home if they can’t secure financing as required by their offer. See Ten Steps to a Fair Appraisal for more information.
In true sellers’ markets, buyers make offers above asking price, and competitive multiple bid scenarios develop that sometimes fall prey to emotion. In these cases, prices can become unrealistic and can influence other transactions in the local market. Soon the push-pull of supply and demand will bring the market back to reality, but both buyers and sellers can get caught up in these scenarios and find themselves paying or receiving something different from what the marketplace might have dictated, minus human emotion.
However, we’re still a long way from the furious insanity that characterized the boom years.
Steve Cook is editor of Real Estate Economy Watch and covers real estate and mortgage finance for leading news sites. He is a member of the board of the National Association of Real Estate Editors and was twice named one of the 100 most influential people in real estate. Cook was vice president for public affairs for the National Association of Realtors.