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In real estate, a seller's market is when there's a high number of buyers and a limited inventory of houses for sale. A seller's market usually causes homes to garner multiple bids, with buyers sometimes offering over asking price and waiving contingencies.
The housing industry has been a sizzling seller's market since mid-2020 when interest rates dropped to record lows. And even with signs the market is cooling due to increased interest rates and some decline in buyer demand, conditions today remain good for sellers. In May 2022, the median home sale price in over 400 U.S. metro areas was up 15% over the previous year, and 56% of homes sold over list price, according to a report by Redfin.
If you're planning on buying or selling, it's important to learn how to recognize a seller's market and how to navigate one.
Understanding a Seller's Market
In a seller's market, demand for housing is high, but the supply of homes for sale is low. This imbalance in supply and demand can lead to bidding wars and rising home prices.
The cause of a seller's market can vary based on economic factors both national and local. For example, certain cities can experience a high demand for homes and low inventory if new businesses open or there's an influx of residents. On a national scale, low mortgage interest rates can inspire more people to buy, and that increase in demand can trigger a seller's market.
While a seller's market is a boon for people who want to list their home, it's a less-than-ideal situation to find yourself in as a homebuyer. In a seller's market, you may face stiff competition when putting in an offer, and you could have to put down more money upfront and borrow more money to buy the home you want.
Signs of a Seller's Market
These are housing trends that signal a seller's market:
- Inventory is low. Few homes are listed for sale, leaving limited options for homebuyers.
- Houses sell fast. Homes on the market sell quickly since there's a high demand.
- Houses sell over asking price. Bidding wars with competing offers occur frequently, pushing sale prices above the original asking price.
- Sellers have more leverage. Sellers have the upper hand when negotiating home prices and deal terms since there is elevated competition among buyers.
Many metro areas across the U.S. experienced all the facets of a seller's market during the pandemic. In early 2020, home listings decreased rapidly as homeowners stayed in place and braced themselves for pandemic-related health and economic uncertainty. When buyers began to flood the market as lockdowns ended and mortgage interest rates dropped, inventory remained tight, causing homes to sell quickly and prices to soar.
By contrast, in a buyer's market, there's more inventory for buyers to choose from and less demand. Buyers have the advantage in this scenario, which can cause home prices to decrease and homes to stay on the market for longer. Buyers may also be able to negotiate more favorable terms in a buyer's market since sellers are more willing to make compromises when there are fewer competing offers on the table.
Tips for Selling a Home in a Seller's Market
Selling a home in a seller's market can be a lucrative opportunity; however, before listing at an ambitious price and expecting the offers to roll in, it's still a good idea to come up with a selling strategy. Here are tips to follow:
- Price your home realistically. Even in a seller's market, pricing your home too high could mean your home takes longer to sell, and you could end up having to drop the price anyway. It could also cause an issue for the buyer if the home ends up being appraised for far less than the sale price. A listing agent can help you come up with a fair price.
- Consider your post-sale housing options. In a hot housing market, you could sell your house before you find another home to buy. Come up with a plan for temporary housing or consider negotiating a rent-back agreement where you rent your old home from the new buyer for a few months until you find a new place.
- Make counteroffers. If you're not satisfied with the terms of deals that come through, consider making counteroffers until you arrive at a deal with a price and terms you like.
- Ask for best and final offers. The strategy of requesting best and final offers from buyers can help encourage serious bids and minimize back and forth. Looking for cash offers or offers with few contingencies could also help you get a deal finalized faster.
Tips for Buying a Home in a Seller's Market
Buying a home in a seller's market can feel like a race to catch a house before someone else snatches it up. Here are some tips to navigate the buying process in a seller's market:
- Understand your budget. Getting clear on what you can afford before you start the home search process can help you avoid making offers on homes you can't afford. Beware that buying at the top of your budget may cause you to become "house poor," which is when a sizable part of your income goes to housing costs and you don't have much left over to pay for other living expenses.
- Don't rush into a purchase. Settling on a home that's not what you hoped for in a hot market could lead to buyer's remorse. A February Zillow survey found that a whopping 75% of people who bought homes within the past two years have at least one regret about the purchase. If you have the flexibility to put off buying a home, waiting until more options come up for sale could help you avoid buying a home you may regret.
- Think twice before waiving contingencies. Waiving financing, home inspection or appraisal contingencies could get your offer accepted—but beware. Without these contract contingencies in place, it can be harder to leave the deal if the inspection finds defects, the appraisal comes in too low or you have trouble securing financing.
The Bottom Line
A seller's market can be an exciting opportunity for sellers and frustrating for buyers, especially first-time homebuyers facing inflated home prices and limited listings. If you're a buyer who's put off by the current market conditions, you could consider refocusing your energy now on preparing your finances and waiting to make a purchase until after the market cools.
Aside from stashing away money for a down payment, working on your credit score can improve your chances of qualifying for a mortgage at a competitive interest rate when the time is right. Experian's free credit monitoring service can help you keep tabs on your score and build credit until you're ready to buy your dream home.