Fri 2 Jun 2006
Keeping The Balance: Is This A Buyer’s Market Yet? Lets Check The Lists
Posted by Jonathan J. Miller under Boom Bubble Bust , Psychology[17] Comments
Well, it depends…
Over the past five years, I believe that the majority of local real estate markets in the US would be referred to as Seller’s Markets and are now being called Buyer’s Markets.
As I have seen the term used more and more by real estate professionals, I began to wonder:
How do you define a buyer’s market and are we really in one right now?
First of all, I would categorize a Seller’s Market as having:
unusually fast marketing time
a shortage of inventory for buyers to choose from, bidding wars, etc.
sales prices closely mirroring list prices
high rate of price appreciation
improving local economic conditions
favorable financing terms available
So it would seem logical that a Buyer’s Market is just the opposite of a Seller’s Market:
unusually slow marketing time
an oversupply of inventory for buyers to choose from
sales prices arrived after larger discounts from list price
no price appreciation or price depreciation
weak local economic conditions, especially employment
unfavorable financing terms such as rising mortgage rates
But how did we flip from a Seller’s Market to a Buyer’s Market seemingly overnight and is that what you would call the market today?
While we are at it, has the market been reduced to one description or the other? Is everyone so used to the conditions from the Seller’s Market that anything else has to be a Buyer’s Market?
I have been amazed at how quickly the terminology changed. It was akin to how quickly the phrase Housing Bubble became Soft Landing, last fall.
An argument for balance_
Because all real estate is local, and I can’t speak for the rest of the country, but in New York, I contend that the overall market is currently _balanced because all the criteria of a Buyer’s Market have not been fully met.
A Balanced Market is usually a market in transition from Buyer to Seller or vice versa:
historically normal marketing times
inventory is steady
negotiability is consistent and becomes a “rule-of-thumb”
no price appreciation
flat local economic conditions, employment is stagnant
non-volatile financing trends
We seem to have all of these conditions, except for inventory. Continued inventory increases and rising mortgage rates could push the overall market into Buyer territory fairly quickly if conditions continue to erode.
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June 2nd, 2006 at 8:56 am
I don’t think it is that cut and dry Jonathan. If BUYERS MARKET vs SELLERS MARKET were a scale, I would say right now we are in between the halfway point between a BUYERS MARKET and the mid-point of the scale.
The reason I think NYC’s market is closer to a buyer market than the midpoint, is quite simply that buyers have POWER & CONTROL in today’s market.
Now, what makes up POWER & CONTROL for buyers or what makes for LACK of power & control for sellers?
Rising lending rates making borrowing more expensive certainly makes for a LACK of control for sellers; all of sudden their property is being marketed to a much smaller buyer pool who can actually afford their asking price.
Rising Inventory certainly makes for a LACK of control for sellers because quite simply now they have more competition. As desperate/speculative sellers quickly lower their asking price to get a deal done, other sellers that have NOT done so are being left behind with a now lower bldg comp going against them!
Negotiability is what today’s market is all about giving buyers a great deal of POWER & CONTROL to get a deal done at a price they are comfortable with! A property is ONLY worth what a buyer is willing to pay and buyers today are NOT chasing high valuations!
Economy is still strong which is why the scale is not fully in the BUYERS MARKET end of the scale. There are still buyers with money and those with all cash can get an even lower price from sellers by offering the security of not having to secure a loan.
Sales Prices today are still being priced at year ago levels causing most inventory to stay on the market longer, before the seller gives in and reduces. The question is, will the reduction give away hte cards the seller is holding (i.e. seller MUST sell ASAP?).
Other forces keeping the scale closer to mid-point: High Rental Prices in NYC and very low vacnacy rate are causing some renters to again consider buying; if they have the assets to do so. Also, the weak dollar is still attracting foreign investment, especially from Europe where the Euro gets a lot of bang for the buck!
All in all, we are much closer to a buyers market than you think and it happened so fast because of the runup in housing prices over the past 2 years. It was simply unsustainable as low lending rates were not going to be around forever; and now wer are seeing effects of higher borrowing costs on buyers. If the fed raises again in June, and assuming we still have 8-12 months of trickling higher lending rates, expect a full blow buyers market (with all new dev inventory coming to market over next 1-2 years) by summer of 2007!
June 2nd, 2006 at 8:58 am
I agree with the first three conditions you list for a Buyer’s market but I’m not so sure about the last three. As a buyer, I don’t want to purchase if prices are actually depreciating (or threaten to do so for longer than my time horizon) or if the local economic conditions are weak. Not so sure about financing, high rates would discourage me but low, volatile rates less so.
June 2nd, 2006 at 10:36 am
Urban Digs. Wow – appreciate the great feedback. I was struck by the assumption that was automatically made “if we are not in a seller’s market, then we must be in a buyer’s market.” If housing prices are flat, that infers that neither buyer or seller has an advantage. Falling list prices have generally not caused actual prices to fall yet (in general). I do agree that we are in transition and I said that we could go into a buyers market very quickly. Thats why I think the fed could actually drop rates by 07 as the housing data hits the stats.
km – with prices falling, I agree volume does drop off, but you as a buyer have a lot more power over the negotiation. People still by properties during declining markets, but there are certainly fewer of them.
June 2nd, 2006 at 11:35 am
sorry didnt mean you, you in my senetence:
“All in all, we are much closer to a buyers market than you think”
…meant ‘everyone’ basically. Came out wrong.
It really is a very strange market and I wonder how you would truly define a BUYERS market. Do BUYERS think they are in a BUYERS MARKET? I don’t know; probably not as they still think prices are expensive and inventory is still somehwat limited.
Prices are definately still on the high side as asking prices are AT year ago levels and when a seller decides to sell, they almost always try to test market first by pricing high.
Agreed on a future rate easing cycle, just not sure on when he will start it. Until then we have lending rates rising and the eventually topping out (prob early 2007) and staying there for who knows how many years; what will sellers do then?
Jonathan, when would you start to look to buy? Me, Im thinking summer of 2007 and buy when we know the fed is close to a rate easing campaign again! Need a broker?
June 2nd, 2006 at 11:53 am
No offense taken at all, I have a surprising number of friends named “You”, “Everyone” and “Hey”.
I last bought in 2004, and since I’ve got college looming for my 4 kids over the next decade I am probably staying put for a while.
I don’t really subscribe to market timing so I don’t know if I would wait at all. If I wanted a larger place, I’d probably go ahead and buy now. I am not interested in renting with a large family and all so I wouldn’t consider that as an alternative. I am struck by the large number of people on the sidelines waiting to see whats going to happen before they make a move. It doesn’t seem to be as much of an affordability issue as it is a confidence issue.
June 2nd, 2006 at 1:53 pm
JM .” It doesn’t seem to be as much of an affordability issue as it is a confidence issue.”
I don’t know how you come to that conclution. I earn over $300,000 per year and for me its an affordability issue. I just rented a 2 bedroom for $3800 per month and the comp to buy would be $1.3 million. I can’t afford to pay $7,000+ per month to own. It has nothing to due with confidence. Its has all to do with dollars and cents. Maybe I have no clue to what people earn in this city, and maybe my measly 300k makes me part of the working poor.
June 2nd, 2006 at 2:02 pm
Hi Bubbleboy. You’re back! I don’t doubt that affordability is a factor, but from your example, I suspect that your mortgage payment was not 50% lower 1 year ago for the same apartment (using your payment example) and assuming you still only made the same masly $300k
Last year at this time the overwhelming consensus was that it was a seller’s market. Thats the point here. It seems to me that something other than the payment issue changed in the market psychology overnight. In other words, affordability has been an issue for at least the past 3 years as the number of transactions has declined. Personal income has not kept pace with appreciation so its something else. Got any ideas?
June 2nd, 2006 at 2:22 pm
JM I’ve been in the game for 2 years. I was the underbidder for those same apt. when they were asking 800k always lost out. Finally last year those asking prices went beyond what I could afford.
So to answer your question, what changed is the starting price to play the game. Unless I start making more money, I can’t afford to buy until comp apts are exchanging hands for 800-900k. So maybe I don’t understand your question, but I think alot of people are in the same situation as me, that is asking prices shot up so very high so very fast, that working poor millionaires like my self said game over. The “dream” of owning became impossible. so we just dropped out of the market.
June 2nd, 2006 at 2:33 pm
I am sorry that it hasn’t worked out. It sounds like you were behind the market curve 2 years ago in the bidding but now its more than you can afford. Actually, my question or reason for the post was more along the line of “why did the market perception shift over night from seller to buyer in the way the market was characterized?” The rental market is currently rising fairly rapidly as more people like you go over to rental. If that momentum picks up and inventory keeps rising, I think you’ll see prices adjust. Right now its a stand off as sellers try to hold firm but their resolve is weakening.
June 2nd, 2006 at 3:21 pm
“why did the market perception shift over night from seller to buyer in the way the market was characterized?†Because those 800k apartments from 1.5 years ago are not selling for 1.3million today.
June 3rd, 2006 at 12:12 am
I know this is off topic, but I was wondering where you (Bubbleboyh) found a two bedroom for $3800?
June 3rd, 2006 at 4:44 am
Out here on Long Island (way out here: Brookhaven Township, Suffolk County) the market is much better for buyers than last year. The open houses are emptier, the prices are lower, and the agents seem worried.
Why so fast? Interest rates went up fast and lowered the amount of money the few remaining buyers could spend on a house.
Now, the news is spreading and seems to be reaching a tipping point. If house prices are flat or declining, there is no reason to buy. But, if you are an investor, there is reason to sell.
Why now?
A. Interest rates. Put down a lot of money ($150k). At 5.5%, a $530k house with 9k/yr in taxes has a payment of about $3k/month. Now, at 6.5%, that same $3k/month payment will get you a $492k house. If $3k/month is all I can afford, $492 is all I can pay.
B. Rents. 1.5 years ago, finding house to rent was do-able. The monthly cost of renting was lower than owning. The difference can go into the bank for a future purchase.
C. Lack of new buyers. Most people who were going to jump on the home owning bandwagon did so. The people who waited, whether due to a sense things were overpriced, job issues, or whatever are the only ones left.
D. Once prices decline a little bit, it is even easier to wait to buy. The cost of owning now must include the anticipated depreciation of the house. Also, once prices decline a little bit, investors try to get their money off of the table. This includes long term landlords. Inventory climbs.
June 3rd, 2006 at 9:21 am
Yes David – I was wondering the same thing. A 2-bedroom for $3,800 seems pretty cheap to me.
Thanks Long Island Lost – I like the way you laid it out. Thanks.
June 3rd, 2006 at 9:33 am
Its a fantastic apt. Newly renovated 5 rooms 1400sq ft. Its on riverside drive columbia university area. I also have full views of the river and park.
June 5th, 2006 at 4:05 pm
I think LIL nailed it.
June 6th, 2006 at 11:06 pm
You (JM) say “I am struck by the large number of people on the sidelines waiting to see whats going to happen before they make a move†as an element of the affordability vs. confidence issue. But how do you know there are so many people waiting? (I am not doubting, just looking for data.)
Fact is Q1 06 had nearly as many transactions as Q1 05 (2,005 vs. 2,028 if my addition is correct), so buyer activity was similar. The inventory data shows many more want-to-be-sellers present in Q1 06 than in the prior year’s quarter, but that doesn’t establish that a “large number of people [are] on the sidelines waitingâ€.
I know “everybody†is talking about this being true, but I wonder if there is data to establish this point, or do we rely on a consensus of anecdotes and opinions?
June 7th, 2006 at 7:40 am
Hi Sandy – great insight – true there’s no data to prove my statement, its just the impression I have dealing with our banking clients and all the brokers we meet during our property inspections. I think we are doomed to “rely on a consensus of anecdotes and opinions” on this point. I am open to suggestions to be able to measure it.