The True Story About a Buyer’s Market

Every now and then you hear on the television, or through passing, or even in daily conversation how the real estate market is always changing. The markets can change from city to city and state to state. You hear terms such as “it’s a buyer’s market,” or “it is soon going to be a seller’s market,” and “it’s a hot market.”

Everyone understands, simply by the description of the terms, that a buyer’s market means the market is best for buyer’s to be purchasing property. A seller’s market means the market is best for seller’s to be selling their property. And hot market, is often used by investors to describe a market where there is a lot of investment activity and excellent land prices. This ultimately means increased return on investment for commercial real estate investors.

So we know what these terms describe, but what about the true characteristics of a buyer’s and seller’s market? Does it differ from residential and commercial real estate? Let’s look at these descriptions and what they really mean and how you can assess the market yourself and not have to rely on what the general public is talking about that specific day.

Many definitions of seller and buyer markets are very limiting. For example, a seller’s market: a market which has more buyers than sellers. Low prices result from the excess of supply over demand. A buyer’s market: a market which has more sellers than buyers. High prices result from excess demand over supply.

These definitions explain why each market is the way it is. However, what are the true ramifications?
Instead of using supply and demand, I prefer to describe these markets through power. Who has the power to call the shots- the purchase price for property.

With a buyer’s market, the buyer has the power to dictate the purchase price. There are so many properties for sell, so many sellers, and not enough buyers for those properties. So if a seller really wants to part with his or her property, they are almost fighting over who is going to purchase the property.
The buyers are going to naturally ask for a lower price because the seller will need to come down in price to sell the property. They could try to hold out for a buyer who will pay them more. However, a buyer could simply move to another similar property that could cover their needs just fine, at a lower price. So with a buyer’s market, they have the power to name the price and the seller’s must succumb because otherwise, they won’t be able to sell the property. That is how the prices are driven lower.

The opposite is true of a seller’s market. In a seller’s market the sellers have the power; they have the power to dictate the price. There are far more buyers than sellers so there is a limited supply of properties. The sellers can easily raise their prices because the buyers will have to pay more than the next buyer if they truly want o purchase a property. So prices in the market are driven higher as the sellers know they can get these prices.

So the type of market it is really has to do with power- who can call the price for a property. In the residential real estate markets, the type of market at a certain point in time is easy to determine. Are the housing prices rising or falling?

In commercial real estate, it is not so easy to determine. This is because there are so many different types of properties: development, building, rehab etc. Depending on your investment strategy and what you are looking for in a market, the terms buyer’s market and seller’s market do not hold as much value as the term “hot market.” A hot market is one where the purchase values are low and the return on investment is high. There is a lot of commercial real estate activity, a high population growth rate, and a growth strategy within the city. Then again, what one investor feels is a hot market is not a hot market to another investor.

Commercial real estate is a special case where the market cycle changes from city to city. And no matter what point in the cycle a city is experiencing, an investor with a specific investment strategy can find value within that specific market. That is a definite benefit of commercial real estate. You can always find value in commercial properties.

With this information, a person can decide when it is best time to sell or purchase a property and you can plan for it before hand. Review daily newspapers, housing and real estate magazines, and you morning news program to see if there are any noticeable changes in the real estate market.

By: Tony Seruga, Yolanda Seruga and Yolanda Bishop