Over the last decade, the real estate was not doing well because of several economic and social factors. However, things have turned around in recent years, leading to experts and investor to wonder whether the real estate industry is finally becoming a seller’s market. Real estate investing has two major cycles; the buyer’s market cycle and the seller’s market cycle. If you are new to real estate investing and unable to tell when it is the seller’s market cycle, rest easy. In this article, we will help to identify when the real estate industry is in the seller’s market cycle.
What is Seller’s Market?
A seller’s market is where the demand for real estate properties exceeds the current supply. Buyers are willing and able to buy real estate properties, but the available properties cannot meet this demand. In a seller’s market, a real estate property listing attracts multiple potential buyers within 24 – 48 hours. Statistically, a sure way to determine whether it is a seller’s market is by calculating the ratio of sales to listings. It is a seller’s market if, in 5 listings, 3 are sold. Therefore, when the ratio of sales to listing is 55% and above, the market is considered a seller’s market.
If the ratio of sales to listing is below 35% or 7 sales in 20 listings, then the market is considered as a buyer’s market.
How Does it Become a Seller’s Market?
Several factors work together to make the real estate investing a lucrative business venture for sellers. Lowering of interest rates by the Fed allows buyers to borrow more hence increasing their purchasing power. An increase in population growth is another factor that works in favor of real estate sellers. This is because an increase in population leads to an increase in demand for housing. Another factor that turns the real estate market into a seller’s market is an increase in employment opportunities and higher income among millennials. The following government policies can also work in favor of sellers:
- Tax credits
- Down payment assistance
- Special low-interest loans
Signs of a Seller’s Market
Here are several signs of a seller’s market you should look out for:
Lower Months of Inventory
One of the most important signs of a seller’s market is lower months of inventory. In real estate investing, months of inventory refer to the number of months it takes to sell all the real estate property listings in a specific market at the current prices and without additional listings within that period. On average, the market’s acceptable length of months of inventory is 6 months. If you notice that all the real estate properties on sale in a specific market received buyers in less than 6 months, that is the biggest sign of a seller’s market.
However, when checking the number of sales in a specific market, also check the prices of the units. It could be a seller’s market for cheaper units but a buyer’s market for the expensive units. In a buyer’s market, the months of inventory exceed 6 months.
Decreased Days on Market
When you are in the real estate investing business, it is always important to note the number of days it takes to sell a single unit in a specific market. Tracking the number of days a property takes before it attracts a buyer enables you to notice any shifts in the market. As an investor in the real estate market, you should do this monthly. If you notice a dramatic drop in the number of days it takes to sell a single unit, then you might be looking at a seller’s market.
If you notice an increase in the number of offers that available real estate properties receive, it could be a sign of a seller’s market. One of the signs of a seller’s market is demand surpassing supply. In a market where a single real estate listing receives multiple offers, it means that demand is exceeding supply, which is a good thing for people looking into real estate investing. There are several available resources you can use to check available real estate listings in your market of interest and the number of offers these listings have received.
Another sign that you might be looking at a seller’s market is an increase in prices of the real estate properties. Lower months of inventory, decreased days on the market, and multiple offers lead to an increase in price. Basic economics explains that in a market where demand surpasses supply, prices will most definitely shoot up. When you notice that buyers are matching the asking price with little bargaining or better yet offering more than the asking price, that is one of the strongest signs of a seller’s market.
What a Seller’s Market Means to Sellers and Buyers in Real Estate Investing
As the name suggests, a seller’s market works in favor of the seller. If you have a real estate property you want to put on the market, this is the perfect time to do it. Work with an experienced realtor to come up with the best price for your property and to decide which offers suit your needs. For first-time sellers, exercise patience when offers start coming in. In a seller’s market, there is always a better offer.
If you are a buyer, an experienced realtor can still help you get a good deal in a seller’s market. To better your chances, ensure you are pre-approved. Another way of increasing your chances of landing a good deal is including an escalation clause in your offer. If you do not have a big spending budget, be flexible with your moving date. A seller is likely to accept your offer over a higher one if your moving date matches his timetable.
If you are thinking of getting into real estate investing, it is important to know the different market cycles. The seller’s market cycle is one of the most important cycles that real estate investors should be aware of. This knowledge will help you make the best investment decisions in a volatile market.