Why Market Conditions Are Important
Homebuyers and home sellers all want to know one thing – how much a home is worth. What they may not realize is that home values can change rapidly due to changing market conditions. Market conditions are the shifting sands beneath your feet.
What are market conditions and how do they impact the housing market? Market conditions are all the macro and micro influences that can come together to impact the housing market. Presidential elections, changing policies, the economy, jobs and social attitudes all impact housing at the macro level, while something as small as the sale of a home or the news of the entry or exit of a mid-size to large employer is a micro factor.
What market conditions influence is fair market value, which Bankrate.com defines as “the factors that influence the housing market in a particular area, such as cost of living, demographics, supply and demand, mortgage rates and more.” At the micro level, it’s best defined as what a willing informed seller and a willing informed buyer are able to agree upon for the sale of a home.
So how do you define the market? That could be quite broad. The market could be as small as a one-street neighborhood with some special quality to a major city, so it’s important that any conversation about market conditions is comparing apples to apples – the same type of homes, neighborhoods, price ranges, etc.
How do you compare homes within a market? Market conditions are like a weather report; it helps you predict what the current crop of buyers will do. Using this knowledge, you can price your home to sell quickly and for the most money possible. A quick sale matters because the right price should generate a bumper crop of buyers, allowing you to move on with your goals.
Here’s what you need to know - what kind of a market are you in? It’s possible that your community could have buyer’s and seller’s markets simultaneously. For example, your neighborhood may be hot, while the subdivision a mile away is stone cold.
A seller’s market takes place when financial conditions are positive. New employers are coming to town, there are plenty of jobs, workers are receiving bonuses and raises, and there’s a general sense of optimism that encourages people to buy their first home or move up to a bigger, better home. This creates more demand for homes, higher home prices and often a shortage of available homes for sale. Homes don’t last long on the market, and soon, there are shortages for entry-level homes and other price points. A seller’s market is characterized by confident buyers, short “days on market” and low inventory levels of less than six months on hand. This usually results in rising prices, fewer sellers’ concessions, and more concessions from buyers.
A buyer’s market reflects a receding economy. Employers slow or stop hiring and salaries stagnate or go down. If major employers exit the market, workers have trouble finding other employment. Confidence wanes, and sellers find that there’s less demand for their homes. Soon, inventories of homes for sale increase, bringing prices lower. A buyer’s market means buyers are cautious and expect sellers to sweeten the pot by presenting updated homes in premium condition. A buyer’s market is characterized by longer “days on market,” and high inventory levels of seven months’ supply or more. To get buyers to come in from out of the storm, sellers must offer incentives such as seller-paid closing costs or lower prices.
The market conditions will tell you the long and short-term trends. If the market is heating up, you can ask a little more for your home. If the market is cooling, you may need to price your home slightly under the market in order to attract more buyers.
One thing you absolutely should never do is ignore market conditions. It’s said the market is always right.