What is a Seller’s Market?
This is a concept that gets throw thrown around in the news, on social media and really anywhere a headline appears. However, no one ever talks about what it is specifically, so today we’re talking about the seller’s market.
“What is a seller’s market?” It’s a very simple question. Unfortunately, the answer is not as simple, but let’s see if we can make it make sense.
In a seller's market, the balance of power lies more with the seller.
In every real estate transaction, two parties come together. You have the buyer, the one with money, and the seller, the one with the house to trade for that money. Now, when you say it’s a seller’s market, it usually means that the balance of power lies more with the seller than with the buyer. That’s what we’re experiencing now in every single market across the country with only a few exceptions.
In a nutshell, in a seller’s market, the seller has most of (if not all) the power. At least from a negotiation standpoint. They have the asset that everybody wants, and the buyers will have to fight for it. Now, I want to discuss with you why we end up in this type of market and eventually, how you can identify if things are shifting from one side to the other.
The number of days and months of inventory that are available is the defining characteristic of a seller's market.
Typically, if you Google “seller’s market” or “balanced market,” you’ll read about the number of days or the number of months of inventory available. You would see that that is the defining characteristic of a seller’s market versus a buyer’s market. You’ll often read things like “six months of inventory is a balanced market.” That’s a national statistic that most experts subscribe to, by the way. Six months of inventory is what most people take as an indication of a balanced market.
However, here in California, historically, we generally chop that number down by a good chunk. Based on historical data, just about two to three months of inventory would represent a more balanced market. This obviously depends on what market and asset class you are in but generally homes turn over faster here compared to the national average. Nonetheless, that number only indicates how many months or how many days it would take for all of the inventory to be bought up and sold down to zero if no new inventory showed up.
On the flip side, if it's a buyer's market...
On the flip side, if you have 8, 10, or 12 months of inventory in any given market, the buyer has more choice at any given time. The principal of substitution tells us that a buyer would not pay more for something equivalent down the street. And when there are several similar houses down the street, the one buyer has more choice, thus more power. They don’t have to compete as hard because the existing buyer pool spread across way more houses. Therefore, they’re not going to have to dig quite as deep. Or, they don’t have to remove contingencies quite as fast or write as high of an offer to get it accepted.
In summary, it is a supply and demand issue.
So ultimately, what we are talking about is a supply and demand balance. When there’s so much demand but not very much supply, the inventory runs out quickly. There are many buyers to buy a few homes. Whereas if there are fewer buyers and more homes, it’s going to take a lot longer for all of that existing inventory to come out. And those sellers will have to price reduce or offer some other kind of incentive to attract the smaller buyer pool who then has the power.
So, what is a seller’s market? Simply it’s a place where sellers hold control. There are fewer houses and more buyers, and the buyers are forced to compete for those sellers’ attention. And, ultimately, for that seller to pick their offer and get them into contracts so they can finally move into the home.
I hope my blog on "What is a seller's market?" has helped you.
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