A Short Summary
For those who are planning to enter the hot housing market this year or sell their property, the recent market volatility can be daunting. So, it’s important to look at what the current market situation is, and what the experts predict for the rest of the year, based on reliable data. This will help investors and prospective buyers or sellers to make the best decisions, with or without a real estate agent.
While the market started the year in favor of sellers, this is shifting as we head into the latter part of the year. As mortgage and interest rates potentially stabilize, home price growth slows down and prospective buyers benefit from the changes in a more balanced market.
Conditions of A Seller's Market
A seller’s market signifies a state where demand for a particular product or service far outstrips its supply. Within this dynamic, sellers find themselves holding a winning hand due to the abundance of prospective buyers vying for a finite number of offerings. This heightened competition propels prices skyward and sets the stage for expedited transactions. This rings true for real estate, as much as any other market.
Essentially, seller’s market materializes as a result of a finely tuned imbalance between what’s sought after and what’s available. As such, seller’s markets are characterized by the presence of bidding wars. Potential buyers who are desperate to secure a property compete against one another and try to outbid each other, and bidding wars ensue.
In a seller’s market, the tempo of home sales accelerates, propelling buyers into spirited competition as they vie for coveted properties in these bidding wars. This often prompts buyers to stretch their budgets, investing more in a home than they initially intended. Consequently, sellers are able to increase their asking prices, which is a maneuver supported by the interest and the realization that buyers’ bargaining power is notably diminished.
Conditions of A Buyer's Market
A buyer’s market materializes when supply outstrips demand, which means that there is an abundance of homes for sale and fewer buyers. The result of this is that even though there are fewer buyers in the market, they are empowered by an array of choices, which leads to a downward movement of real estate prices, and properties lingering on the market for extended periods.
This environment fosters a climate where negotiations are pivotal. Sellers, cognizant of the prevailing market dynamics, become more open to meeting buyers halfway. The aim? Preventing potential buyers from turning away and seeking more accommodating terms. As such, a competition of price adjustments ensues, carving out the opportunity for buyers to create good deals.
Why The First Half 2023 Has Been A Seller's Market
If you’re thinking about buying or selling property this year, you may be apprehensive, given the volatile nature of the real estate market over the last few years. So far, in 2023 the median existing home sale price has reached a record-high, that has only been seen once before in June 2022. According to National Association of Realtors (NAR), the median home price hit $410,200 and may even surpass its previous record.
In the first half of 2023, the real estate market experience high mortgage and interest rates, but despite this, there was a robust demand. There has also been a shortage of inventory experienced across the country thanks to people not wanting to sell their homes because they purchased them at very low interest rates (around 3%). While a balanced market would be first prize for many, this is still not the case in the US.
In the initial six months of 2023, according to Redfin, around 14 homes out of every 1,000 were sold. In contrast, during the equivalent timeframe in 2019, this figure stood at 19 homes per 1,000. This indicates that potential home buyers now encounter a 28% decrease in available housing options compared to the period before the upheaval caused by the pandemic in the US housing market.
While new construction began to rise, it still wasn’t enough to cover the rising demand for properties that the market was experiencing. Along with this, buyers simply haven’t been able to afford higher home prices, which has forced sellers to lower their prices to accommodate this.
As we’ve covered above, when a market has a higher level of demand, coupled with a shortage of supply, this creates the phenomenon that is a seller’s market. In this case, sellers have been able to capitalize on the lack of supply and robust demand, by increasing home prices steadily. While this isn’t likely to continue to the same extent over the rest of the year, there may still be price increases, but they aren’t likely to be as drastic.
Is The Market Shifting To A Buyer's Market?
Most of the predictions for the real estate market in the US for the remainder of 2023 involve lower prices, waning buyer demand and higher borrowing rates. Many buyers have been iced out of the market by the rate hikes that have been experienced recently. Also, in the first half of the year, there was a shortage of housing inventory.
The predictions are that inflation will stabilize by 2024, which means that mortgage rates will stop rising. In a knock-on effect, home prices will still rise, but at a much slower pace. However, inventory may still be on the lower side, so this leads to an interesting situation for buyers who may be able to pick up good real estate deals in the second half of 2023.
Some experts believe the market certainly is shifting from a seller’s market to a buyer’s market. Lindsay McLean, co-founder and CEO of HomeLister is one such expert who indicates her thoughts of buyers gaining more leverage, by saying, “As mortgage rates rise and affordability dips, sellers may have to shift their expectations to match the changing market — and buyers [will] have more leverage.”
She went on to say that “Buyers are finding they can once again buy without waiving contingencies and sellers are starting to offer concessions… However, many sellers hold low-interest-rate mortgages and are not under pressure to sell and so may hold out for the offers that they want.”
The predictions for the rest of 2023 are that the US will continue to face housing inventory shortages, and affordability may continue to be an issue. Fannie Mae’s economic and strategic research group wrote online, “We continue to expect that existing home sales will decline modestly through the rest of the year amid a broader economic slowdown, ongoing affordability constraints, and limited inventories of homes available for sale,”.
How To Determine The Housing Market Conditions In Your Area
Assessing the market conditions in the area where you will be purchasing property is imperative. This vital step will allow you to gain insights into supply, demand, and pricing trends, by closely analyzing data from the market. Here’s a step-by-step guide that you can follow to determine the housing market conditions in your area:
Step 1: Collect data from various sources
The first step towards determining your local housing market conditions is to collect data on listings, recent sales, and property values from a variety of reliable sources (such as a local real estate agent). These include:
- Real estate websites such as Zillow, Redfin and Realtor.com
- Government agencies such as census data and property records
- Local real estate agencies or real estate agent
- Housing reports from research firms and industry associations
Step 2: Analyze inventory, days on market, price trends and sale-to-list ratio
A look at the housing inventory in an area can provide useful insights into whether the area is likely a buyer or seller’s market. A seller’s market, for example, would be characterized by low inventory, in comparison to historical averages.
The number of days that homes spend on the market indicates how fast they are selling. This is also indicative of the market conditions, for example in a buyer’s market homes are likely to be on the market longer and in a seller’s market they are likely to be on the market a shorter duration.
The price trends of an area are a good indication of the market conditions as well. Rising prices often signify a seller’s market, while declining prices can indicate a buyer’s market.
The sale-to-list ratio is a comparison of the original listing or asking price of homes, and the price they were listed at. A high ratio suggests strong demand and a seller’s market, as many homes are selling above the asking price.
It’s important to note that closing costs themselves do not directly determine real estate market conditions. However, closing costs can be influenced by the prevailing market conditions and, in turn, these changes to closing costs can impact buyers and sellers.
Step 3: Check mortgage rates
Keeping an eye on current mortgage rates is always a useful exercise. The lower the mortgage rates in an area are, the more likely it is to be a seller’s market as demand is higher, and the reverse is true for buyer’s markets.
Step 4: Monitor absorption rates
Calculate the absorption rate by dividing the number of homes sold in a month by the total number of homes on the market. A lower absorption rate indicates a buyer’s market, while a higher rate suggests a seller’s market.
Step 5: Assess economic indicators
Local economic factors like job growth, unemployment rates, population changes and more will indicate the general economic state of a market. This often indicates whether the market is in favor of buyers or sellers, in other words a robust economic situation can indicate a seller’s market.
The benefits of examining the housing market conditions to determine whether they’re in favor of sellers or buyers are significant. Let’s take a closer look at these benefits:
Informed Decision Making: Gaining insights into the current market conditions empowers you to make decisions based on a solid foundation. For buyers, this means understanding whether the market favors buyers or sellers, shaping negotiation strategies accordingly. Sellers can accurately price their properties and strategize timing.
Price Insights: Being aware of market trends is a key element to making sure that a property is priced right. Looking at the local market will provide insights into the price of homes that are similar. For sellers, this is an invaluable tool to make sure that a home is listed at the right price (before a real estate agent is even involved), and for buyers this is a good way to ensure that they’re making a reasonable offer on a property.
Timing Considerations: Understanding the local market conditions will allow for better timing on real estate deals and allow sellers to sell quickly. For example, a buyer’s market may present optimal conditions for finding bargains, while a seller’s market might encourage patience for a favorable offer.
Negotiation Leverage: Market knowledge is a great tool for negotiations, both in a buyer’s market and a seller’s market. Insights on the local home prices are a useful tool for negotiating as these allow a buyer or seller to have a more informed opinion on home prices in the area, and therefore have a good understanding of whether a property is over or under priced.
Avoiding Common Mistakes: A deep understanding of market trends helps you steer clear of common errors. In a seller’s market, buyers won’t risk overpaying for a property, and sellers won’t miss potential offers with unrealistic pricing in a buyer’s market and therefore sell quickly. This can help buyers and sellers save a large amount of money and get better real estate deals.
Financial Planning: Potential buyers can plan their finances better with local market knowledge, as they will have a better idea of mortgage rates and other important financial factors. Sellers can also benefit from this knowledge, as they can gauge their potential proceeds and plan ahead, with this in mind.
Comparative Analysis: Comparing similar properties in the area facilitates further market insights which helps gauge a property’s value relative to the market. This is done by identifying comparable sales and listings on the market, for example the same number of bedrooms and bathrooms, in order to see if the property you’re selling or buying is in line with these numbers.
Risk Management: Familiarity with market conditions aids in lessening risks linked to real estate ventures. This can help buyers and sellers anticipate any potential challenges and setbacks that they may face.
Is The Housing Market Likely To Crash In The Near Future?
When mortgage rates sunk to all-time lows in 2022, and home prices went through the roof, talk of a housing market crash became rife in the markets. However, when home prices were poised for a correction, instead of the major decline that was expected, home values and the asking price for homes continued to rise. In fact, according to National Association of Realtors (NAR), more than 50% of US metropolitans experienced a rise in home prices in the second quarter of 2023.
Lawrence Yun, NAR’s chief economist, expressed that he’s certain the housing recession is over. While Skylar Olsen, chief economist at Zillow, home prices are likely to keep rising in 2024. Most experts agree that home prices are likely to continue rising, however they won’t be increasing at the pace that they have been. In other words, while a market correction may happen, the experts don’t believe that it will lead to a recession.
The main reasons that the real estate market is unlikely to descend into a recession are that homeowners possess more home equity than previous years and have much better credit. A study done in June 2023 by Redfin revealed that a staggering 82.4% of existing homeowners currently maintain mortgage rates beneath the 5% threshold.
In a nutshell, the experts predict further increases in home prices, however not at the breakneck speed that they were rising, and it’s unlikely that a recession will occur.