What Is The Difference Between A Buyer’s And A Seller’s Market?

If you are around residential Real Estate at all, (and aren’t we all?) you will inevitably hear agents, lenders or other pundits refer to “buyers markets" and “sellers markets.” But what is the difference? And are these the only types of Real Estate markets possible? What about a “regular market” or “balanced market”?
This article is written to clarify what buyer’s and seller’s markets really are. Also to sort out some of the subtleties and vagaries of the terms and the understanding (or misunderstanding) of Real Estate markets in general. I will draw upon my personal experience as an agent and will get some opinions of my colleagues as well.

The most simple and generally understood definition of a “buyers’ market”, is a period of time in which the home buyers have a distinct advantage when entering into contract negotiations with the home sellers. A “seller’s market” is the opposite, the home sellers have some “leverage” or advantage when entering into negotiations with a prospective buyer (or buyers). Generally the advantage or leverage on either side is created by your basic supply and demand economics.
When demand is high (i.e. many qualified buyers in the marketplace) and supply is low (i.e. not enough homes on the market) you will have a classic seller’s market. In residential Real Estate “supply” is often called “inventory.” In the Bay Area inventory has been low relative to demand broadly speaking for the last two years or so (2013 - 2015). This has caused prices to rise very quickly.
The opposite situation occurred between 2007 and 2010 (roughly). In the Bay Area (as with the rest of the country) a great deal of homeowners were forced to sell due to the mortgage and credit crisis. This caused an oversupply of homes for sale and due to the tightening of lending policy there was not many qualified buyers in the marketplace to keep up.

What do these two distinct markets mean for the buyers, sellers, agents, lenders and owners who are operating in these conditions?

In a seller’s market, as we currently have in the Bay Area, values are rising year over year, homes are selling quickly (if priced well relative to condition and location), and often homes in desirable areas may receive multiple offers and ultimately sell for well over listing price. Also sellers are more able to name other conditions of the sale that may be favorable to them. Such as a rent back period, a quick close of the sale (21 days instead of 30 days for instance), or even a shortening (or removal in a particularly hot market) of the buyers contingency periods. Contingency periods act as a buffer of time within which a buyer may back out of a transactions if certain conditions are not satisfied (home is in acc condition verified by inspections for instance). The shortening of contingency periods forces a buyer to act with haste and urgency in completing the closing process. Broadly speaking a seller’s market allows sellers to be very picky and particular and it forces buyers to compete and take on more costs and risks in order to get the home they desire.
In a buyer’s market, as was experienced during the great recession, many homes are coming on to the market and not selling very quickly or at all, home values are decreasing year over year, and home sellers are happy to even get one qualified offer somewhere close to the price that they listed there home at. Sellers may have to offer buyer incentives to purchase their home such as a seller credit of cash to buyer or repairs to the home (major or minor). In this market a qualified buyer will have a great selection of homes to choose from and will likely be able to make offers under listing price and ask for concessions from the seller. Broadly speaking a buyer’s market allows a buyer to be very particular and picky and it forces sellers to compete and take on more costs and risks in order to sell their home.
Of course the leverage and position can be relatively equal between buyers and sellers rather than being heavily slanted to one side. In this case we might say that there is a “normal” or “balanced” market. This would mean that supply was meeting demand. And it would mean that Housing pricing were staying somewhat flat or perhaps moving gently upward year over year. In this type of market neither the buyer nor the seller are able to steamroll the other side for everything they want. Transactions in this type of market will be more equitable. Interestingly this type of market is not very common. Usually the advantage lies on with either the buyer or the seller. For an example let’s look at the median prices in Alameda County over the last 9 years ending in 2014. I used the average of the median prices in April, May and June in each year and calculated the percentage increase or decrease.

Median House Price Comparison in Alameda County,CA 2006 - 2014:

Year	Median Price Average	Increase/Decrease from last year
2006	$ 664,646	+5%
2007	$ 695,972	+ 2%
2008	$ 556,308	- 21%
2009	$ 420,441	-24%
2010	$ 501,554	+ 19%
2011	$ 467,856	- 7%
2012	$ 478,603	+ 2%
2013	$ 638,837	+ 33%
2014	$ 737,240	+ 15%

As you can see in 5 of the last 9 years the price change has been over 10% in one direction. This shows that Alameda County housing has been quite volatile over the short term and has consistently had a market that strongly favored either buyers or sellers, and not both.

Here are some opinions of other local Tri Valley Real Estate professionals:

“When supply goes up and demand goes down there is a buyer’s market. When supply goes down and demand goes up there is a seller’s market. There isn’t much room in between.”
Kelly Franco, Realtor
“The difference between the buyer's and seller's market is that during the seller's market, the sellers can literally ask for anything they want in terms of price and terms and they often get them. Sellers’ market happens when there are high demands from buyers with a shortage in home inventory. One of the major contributing factors to a high demand from buyers is the low interest rate when getting a loan. During this market, I have often seen the buyers willing to pay for the difference in the appraisal value, the sellers' fees, and all repairs, especially when sellers receive multiple offers for their home. During the seller’s market, if the home is priced correctly and competitively, most homes will go into a pending contract within two weeks of the home being placed onto the market.
During the buyer's market, sellers have to be very diligence in pricing their homes and then they would have to consider taking a lesser price and better terms for the buyers. Sellers will often offer extra incentives to sell their homes such as offering closing costs to the buyers. During this market, homes will stay on the market for a longer period of time. In an extreme down market, I have seen sellers offer other incentives as well, including offering a two weeks’ vacation and other incentives in addition to already paying for the buyer’s closing costs. Sellers will often pay for all of the repairs too during this market.”
Mony Nop, Realtor
If you are planning on buying a home or selling your current home in the near future, it is crucial that you are aware of the current market conditions in your area (town, neighborhood, and even street). Current market data should inform sellers on what price to list their home and how quickly they can expect to sell. Conversely up to date market data should inform buyers what they should offer on a given home, how quickly they should offer after list date and how many other offers they may be competing against.
If you are curious about any of these topics or if you or someone you know is in need of any Real Estate related consultation feel free to contact me directly.
Max Manatt
Keller Williams Tri Valley
925 980 3375
max@maxmanatt.com