If you pay any attention to real estate news, you’ve probably heard this recently:
“We’re in a seller’s market.”
Is it just me, or does that sentence sound kind of scary? Especially to people who are thinking about buying their first home. It probably makes you wonder, “what exactly is a ‘seller’s market?’ If I’m thinking about buying a home, should I wait until there’s a ‘buyer’s market?’ When will that even be?”
I want to share with you what a “seller’s market” really is. It’s not just a matter of opinion: there’s a mathematical basis for determining if we are in a seller’s market, a buyer’s market, or neither.
We’re about to dive into an economics lesson. Hopefully you remember your ECON 101 classes!
The terms “seller’s market” and “buyer’s market” are measures of supply vs. demand for homes. For supply, we measure the number of homes that are currently for sale in a specific area. We call the supply “inventory.”
For demand, we can’t really measure the number of buyers looking for a home, but we can measure how fast homes are being bought. So, we talk about demand in terms of how long the existing inventory would last us – if no other homes came on the market after today. In other words, if the homes for sale right now were the last ever to be listed for sale, how long would it be until they were all bought up (and inventory got to zero)?
The answer will be some number of months. That’s where you get your seller’s/buyer’s market determination. The exact threshold varies a little from market to market, but in the greater DC area it looks like this:
If the answer is 4-5 months, the market is neutral. It’s not a seller’s market, and it’s not a buyer’s market.
If the answer is 6 months or more, we are in a buyer’s market. There are tons of homes for sale, and not that many buyers, so the buyers have more negotiating power than the sellers. In this kind of market, the prices of homes decrease. (High supply + low demand = the price equilibrium is lower.)
If the answer is 3 months or less, we are in a seller’s market. There are more people who want to buy a home, and there are fewer homes for sale. Buyers will have to compete with each other, and prices of homes will drive higher. (Low supply + high demand = the price equilibrium is higher.)
Phew! That was a lot of abstract economics. Let’s put that into real numbers, and see what happened in Arlington in October 2017 (the last full month’s data I have when writing this). This is the data for all homes for sale under $1,000,000. (The over $1,000,000 market is a topic for another day.)
How was the market in October?
There were 395 homes for sale (between $0 and $1,000,000).
There were 205 homes that accepted an offer, and went “under contract.”
The first number divided by the second number gives us 1.95.
That’s 1.95 “months of inventory”… meaning we had a strong seller’s market in October.
That makes sense, since we are experiencing all the major symptoms of a seller’s market: Higher average prices than past years, lower number of days on the market (the homes are selling quickly), and multiple buyers submitting an offer on the same home.
When will the seller’s market end? Unfortunately, I don’t know the answer. Real estate and mortgage professionals can speculate all we want, but no one can predict the future. It’s true that our housing economy goes through cycles, but those cycles are not always consistent in how long they last.
If you’re somebody who wants to buy a home, but you’re worried that the market isn’t right for it, my advice to you is:
Don’t try to time the market. Economic forces will continue to impact the real estate market from now until the end of time. The thing is, we only know when prices were at the highest or the lowest by looking backwards – we’ll never know it when it’s happening. Even if you did somehow predict the future and you waited until home prices were at their lowest, you might have missed out on years of building equity. That loss could easily undo all your savvy economic analysis.
Buying a home is a major life decision, and you should make that decision based on where you are in your own life. Are you in a financial position to buy a home? Are you stable in your job? Do you think you’ll want to live here for a while? If you keep renting, are you comfortable paying more if your rent goes up next year? (We also happen to be in a “landlord’s market,” which means rents costs tend to keep going up. Read more on the costs of renting vs. buying… Coming Soon!)
If you do buy a home during our current seller’s market, you will be OK. You might have to work a little harder to find your dream home, and you might even have to compete against other buyers who make an offer on the same home. But when you do find that perfect house, condo, or townhouse, it’s going to be much more than an investment vehicle to you – it’s the foundation where you and your family will make your most important memories.
Thanks for reading!
Keller Williams Realty
2101 Wilson Blvd. Ste. 100
Arlington, VA 22201