Experienced real estate investors will tell you you make your money on the buy. This means it is difficult to make a profit on a property you overpay on from the beginning. The lower your cost to gain an investment property, the more potential for profit, and the more cushion you have for unexpected repairs or delays. When buying real estate, what you pay for a property is everything, and that’s why it’s important to know the difference between a buyer’s and a seller’s market, and which one gives you the advantage.
Typically, it is better for investors to purchase properties during a buyer’s market. During this market prices are lower, and inventory is up. There are several indicators available to help determine the current real estate market for your area. In this article, we will look at three key factors in determining if the market you are in is a seller’s market. We will also look at the real estate cycle and give you pointers on reading it.
What Is the Real Estate Cycle
When buying real estate, you must understand the real estate cycle. Like most financial markets, the real estate cycle is constantly moving. There are two pinnacles in this cycle, the buyer’s market, and the seller’s market. There are varying degrees of both as you move through the cycle. The cycle has no set length of time, as many other factors can affect it, including interest rates, economic growth, availability of financing, and the number of new builds being produced.
In a seller’s market, it is easier for owners to sell their homes, as there is little inventory and more buyers. In these markets, sellers can sell their homes for more, and in a shorter time period. In a buyer’s market, the opposite forces are at work. When a buyer has the advantage, the inventory is high, and sellers are more likely to drop their sal’s price. While you can purchase real estate in either market, it is easier and more deals are available in the buyer’s market.
The Macroeconomic Cycle Versus the Microeconomic Cycle
If you examine the real estate market since just after the Depression through to this decade, you will see a steady increase in value overall. This means that for every ebb in the market, there was an increase that took the market even higher than it was before the drop. Realistically, if you have no timeline on how long you can hold on to a property, you could wait out any dip in the market, but if you are an investor, especially one who will flip the property quickly, then timing is everything.
While there is a national real estate market (macroeconomic) that is affected by the overall price indexes and interest rates, there are hundreds of micro real estate markets, as local markets are affected by local happenings. On the micro-level, things like local school ratings, and new employers taking up shop in town make a difference. New jobs and great schools both impact the demand for houses in that area in a positive way.
Local markets are also affected by new developments. If you are buying a house in a neighborhood that is not completely developed, all the sellers in that neighborhood have to compete with the builder who is still constructing new homes. This will affect the price points in that and surrounding neighborhoods. Close by developments and roadways also affect demand. For most areas, a home that backs up to a manufacturing plant or a freeway will be less desirable than those that don’t.
Three Ways To Determine If It’s a Buyer’s Market When Buying Real Estate
As you can see, there are many outside factors affecting the real estate cycle. While it is important to pay attention to indexes such as interest rates, and the national overall market, these factors are not the end all be all for your local real estate environment. When buying real estate in a local market, it’s important to work through these following three signs to make sure it’s the right time and the right property to invest.
One sure sign of the cycle’s leaning is the amount of inventory available in the area. Real estate experts note that a healthy and balanced real estate market will contain a six month supply of homes in a market. If the inventory amount is greater, then that the market is a buyer’s market, and if it leans less than that, then it is a seller’s market.
The first step in determining the inventory’s leaning is to calculate the current supply. To do this, you take the most recent month’s number of active listings, and the most recent month’s number of closed sales. Divide the number of listings by the number of sales, and this gives you the number of months inventory that is available. If this number is greater than 6 (six months), then the market is in your favor if you are looking to buy.
This factor takes some time and homework to assess, but it is a great indicator of where the market is leaning. As you review listings in the area where you will invest, note the sales prices. Are there a lot of sellers who have dropped their listing price within the last few weeks? When a seller drops their price, this typically means they are not seeing a lot of interest at their current list price. This could also show an overall eagerness among sellers to sell.
Time on Market
Another factor to consider when determining the market’s current temperature is the time homes are on the market before they sell. To get a better picture of where the market is going, compare this number to three, six, or even twelve months ago. If the length of time on the market is increasing, this is a sign that the current market is leaning towards favoring the buyer. As homes sit on the market longer, sellers are more apt to lower their prices or offer favorable terms to buyers in the contract.
If you are looking to invest in real estate for the first time, it is a wise and stable option for building your net worth and income stream. There are many options in the market daily, and it’s the only investment avenue that allows you to leverage the bank’s money. While it is easy to enter the real estate market, it isn’t something you should do without first doing your homework. So get out there and study your market and make that first buy.