Buyer’s/Seller’s Market- Explained
If you’ve stopped by to take a look at our Market Data Center, you probably noticed quite a few graphs indicating average Months of Inventory figures with “Buyer’s Market” and “Seller’s Market” written alongside them. The first time I heard about these terms, I didn’t know what they meant, or what significance it had. So for you first-timers who may not be familiar with the term at all, or to those folks who just need a refresher, here’s a quick breakdown.
Tl:dr – Buyers Market = Good for Buyers. Sellers Market = Good For Sellers. Balanced Market = No advantage to either side.
The above graph represents the $1 Million to $1.5 Million price range in The Woodlands, Texas, for the month of October, 2015.
It would first help to know what Months Supply of Inventory means. Months of inventory, or “absorption rate” are used to the measure of how fast the market would be depleted of inventory if both supply and demand remained constant, and no new listings were added to the market. Let’s simplify with an example.
Say there are 100 homes For Sale at the end of the month. In the same month, 10 homes sold. Based on this current month’s sales rate of ten homes, you could divide 100 homes for sale, by 10 homes sold this month to arrive at 10 months supply of inventory based on the sold rate of the current month.
(Note, when we calculate Months of Inventory for our Market Data Center, we use an average of the past 12 months of “solds” to account for cyclical variations in the market. So if 240 homes were sold in the past 12 months, we’d divide 240/12 to arrive at an average of 20 homes per month. Based on the same 100 active homes for sale, we would arrive at 5 months of inventory at this rate. 100 actives/avg of 20 homes sold = 5 MOI. You can see why using one month of data would not be advisable to calculate these figures, as a small data set can skew results.)
Great. So we have a Months of inventory figure, what do we do with it and what does it mean?
We typically judge months of inventory on three criteria. It’s either a buyers market, a sellers market, or a balanced market. Generally, a seller’s market occurs when months of inventory is under 6 months. It’s called a seller’s market because the supply and demand favors the seller. In these circumstances, there are many buyers for every house that is for sale. Supply and demand would indicate higher prices for sellers and more competition amongst buyers. Seller’s Market = Good for Seller’s.
A buyer’s market is just the opposite. Demand is less than supply, so naturally this situation would favor buyers. Because there are many houses available on the market, and only a handful of buyers, sellers will need to be very competitive in pricing their homes. Overpriced homes in a buyer’s market are destined for expiration. Buyer’s Market = Good for Buyers.
If you glance back at the chart below, you’ll find a red line running constant at 6 months. This represents a balanced market. This means that the market is stable, it’s not a buyers market nor is it a sellers market. Supply seems to meet demand and there is no advantage to either party.
So what does this graph mean? Well we saw the $1-1.5 Million price point transition from a seller’s market to a buyer’s market in July of 2014. The market shifted and now there are more homes available for sale than there are buyers. We saw a spike in May 2015 that brought months of inventory to nearly 14 months, but has since dropped to a point under 10. Every month we’ll update these figures to see if we’re trending closer to a balanced market, or if we’re headed for a more competitive buyer’s market for this price point.
You can use this to analyze every one of the months supply of inventory graphs available in our Market Data Center. Be sure to let us know in the comments if you have any questions, we’d be happy to clarify any points.
The Kink Team is a family-owned real estate business, and is just part of the reason why so much care and attention is emphasized with each and every client. The Kink Team is recognized as one of the top producing real estate teams in North America and is highly awarded within the industry. Since 1999 we have helped over 1,200 clients buy and sell over $500 Million in local real estate. Let us go to work for you. Contact us today.