We all hear about the different types of real estate markets in the media, around the office and/or social media especially when one is actually thinking about buying or selling real estate. What is a Seller's Market and what is a Buyer's Market and how do you know when you're in one or the other?
As one can guess by the titles - a Seller's Market is when prices are going up and inventory is low or going down, homes are selling fast and often multiple offers are received, sold prices over asking price are common and in general the market conditions favor the seller. Often Seller's can be tough on negotiations.
A Buyer's Market is when market conditions favor the buyer - inventory is up, the number of sales is down and prices are dropping and most sales are less than full price. Seller's are happy to receive an offer and are motivated to negotiate with the buyer to make it work.
Just what are the quick, at a glance indicators that tell one what the market conditions are, without having to study and compare all the market statistics, to know when it's a Seller's Market or a Buyer's Market? There are a couple of related indicators that are primarily used to indicate what type of real estate market one is in.
Months of Inventory
The most common one is Months of Inventory. Months of Inventory is how months it would take to sell all of the existing inventory based on the current rate of that homes are selling at (the average number of homes sold per month). For example if there were 100 homes on the market right now and and the average number of sales per month is 50 homes sold, that would be 100/50= 2 months of inventory. Here's a rule that is commonly (but not universally) agreed upon, a Seller's Market would be 0 to 4 months of Inventory. A Balanced Market would be 4 to 6 months on Inventory. A Buyer's Market is when there is 6 or more months of inventory. As of the end of Oct. 2019, the Months of Inventory for Bellingham WA was 1.6 Months.
The other common indicator of what type of market one is experiencing is called the Absorption Rate. The Absorption Rate is the inverse of the Months of Inventory. It is the rate at which homes are selling for a given time period divided by the number of home on the market for that same given time period. Here's the formula: # Sold homes per unit time/# of homes on the market per unit time. For Bellingam WA 79 homes sold in Oct. and there were a total of 145 Active home listings. That's an Absorption Rate of 70/145= 54.5%. Per Investopedia an Absorption Rate of 20% or higher indicates a Seller's Market, 15% to 19.99% is a Balanced Market and an Absorption Rate of under 15% is a Buyer's Market. We can be thankful that we are still in a very strong real estate market here in the Pacific NW.