Will the Current Residential Real Estate Market Lean Buyer’s or Seller’s?

Recent predictions for the 2018 housing market are all over the map, and for good reason. Last year, experts predicted that the housing market would cool in 2017—but instead residential real estate remained hot in most markets.

Given 2017’s unpredictability, some experts are being more conservative with their positive 2018 forecasts. Others are even less optimistic, predicting that 2018’s residential real estate market will cool or that we’ll see another housing bubble within the year.

If these conflicting opinions have you on the fence about listing now or waiting a year or two, rest assured—selling your home in 2018 is the smart move.

Why? Because, thanks to key market conditions, this year is starting out as a strong seller’s market. Some analysts are even calling 2018 The Year of the Seller.

But there’s no guarantee that the housing market will stay strong.

After all, as the recent steep stock market decline indicates, “what goes up, must come down” isn’t just an expression of Newton’s Third Law of Motion.

There are indications that home prices will continue to rise in 2018, as they have for more than a decade.

However, some economists predict this growth will slow and even decline in some regions. A trend we’re already seeing in some parts of the U.S.

2018 housing market home sales and prices2018 Housing Market Home Sales and Prices

(Credit: National Association of Realtors)

In some areas, home prices are actually around 1% lower than they were just over a year ago. And when existing home sales prices stagnate or decrease, you lose equity in your home.

So what exactly causes your home’s value to fluctuate? It all depends upon housing market conditions in your area. Let’s take a look at the elements that impact your local market.

3 Current Real Estate Market Indicators

When compiling a Comparative Market Analysis (also known as a CMA) for your specific property, your real estate agent will examine local data on currently listed and recently sold homes. But for a clear picture of the larger market, experts look at three factors: inventory, economy, and mortgage rates.

Inventory

In real estate terms, inventory is measured in months of supply, meaning how long it would take the current number of listed homes to sell out. For example, if there are 3,000 homes available at a given time and they sell at a rate of 1,000 a month, that’s a three month supply of inventory.

When the number of homes available and the number of buyers in the market increase or decrease, so does the month’s supply of inventory.

Michael J. Okun of Sotheby’s International Realty in Los Angeles, California, who ranks in the top 1% out of 37,499 seller’s agents, explains:

“It’s all about supply and demand. It’s simple economics. Months of inventory dictates whether it’s a seller’s market or buyer’s market. In my area, if we have three months or less of inventory, it’s a seller’s market. If we have four to six months of inventory it’s more of a neutral or balanced market and over six months of inventory is a buyer’s market.”

The good news for sellers is that low inventory has been driving the market for quite some time. And that trend is on track to continue well into 2018.

In fact, Reuters recently reported that existing home inventory reached an all-time low in December 2017, the lowest it’s been since January 1999.

When you have more buyers than available properties, home prices rise which can price some buyers out of the market.

Economy

Homes can only sell if buyers can afford the monthly mortgage payment. So when economists look to forecast real estate trends, they factor in the Housing Affordability Index (HAI).

Simply put, the HAI measures the median household income against the median income needed to purchase a median-priced home. Since household income is impacted by the overall health of the U.S. economy, the experts also look at larger economic indicators.

Luckily for sellers, the overall economic outlook for 2018 is good both in the U.S. and the world. And according to The New York Times, higher wages and low unemployment signal that this year is starting out economically strong.

World Economic Outlook Update- Jan 22, 2018

Of course, income isn’t the only consideration that buyers look at when they’re deciding whether or not they can afford to purchase a home.

Mortgage Rates

When mortgage rates increase so does the mortgage payment. It’s that increase in the monthly bill that can push purchasing a home out of reach for some buyers.

While mortgage rates fell to record lows as recently as August 2016, those rates are on the rise. In January 2018, mortgage rates jumped above 4%—the highest they’ve been in four years.

How big of an impact does that rate hike have on a mortgage payment? According to CNBC:

“If a borrower took out a $200,000 mortgage in the middle of December, when the average rate was around 3.875 percent, they would have had a monthly payment of $940 (that’s not including taxes and insurance). If they were to take out that same loan today, the monthly payment would be $1,013.”

However, in some markets buyers are learning that a mortgage payment is  more affordable than rent.  And while the latest mortgage rate increase will drive some buyers out of the market, others are clamoring to purchase a home before the rates increase again.

After all, the experts at the Mortgage Bankers Association anticipate that rates will increase to the 5.0% level by mid-2018.

Despite rising mortgage rates, the number of home sales is expected to  increase in 2018. Thanks to the low inventory situation and positive economic growth, many regions throughout the U.S. are experiencing seller’s market conditions.

Selling in a Seller’s Market

Combine the continued low inventory trend for existing homes with the fact that new construction has yet to catch up to demand and you’ve got prime seller’s market conditions.

True to its name, a seller’s market is the optimal situation a homeowner could ask for when it’s time to list. Why? Because with too many buyers and too few homes you’re set to get multiple offers on your home.

Multiple offers means you’ll be negotiating the price and contract terms with several buyers at once—a situation often referred to as a bidding war.

In a bidding war, the adrenaline of competition leads buyers to up their offers, often paying well over the list price. But getting multiple offers isn’t always a guarantee, even in a seller’s market.

While it’s true that home prices are on the rise, some sellers misinterpret this to mean that they can price their home above  current comps. In that situation, not only will the sellers not receive multiple offers, they may not receive any at all.

And that’s just one mistake homeowners can make when listing in a seller’s market. Another comes down to timing.

What a difference a month can make—even in a seller’s market the time of year can impact how good an offer you can get. Okun has some experience with this:

“About two years ago I had a home listed in October. We had a ton of showings,  got one full price offer and went into escrow. Then, all of the sudden, the buyer backed out of escrow. So we decided, since we’re getting into the holidays, let’s wait. So we relisted it in late January. Three months later, we had multiple offers and we ended up getting $150,000 over our list price. So three months made the difference of $150,000 for the same house.”

If you’re not on a deadline to sell, a top-notch agent may advise waiting a few months before listing until buyer demand and home values reach their peak. However, if you’re in a balanced market, getting at or just below list price is the norm.

Selling in a Balanced Market

Also known as a neutral market, a balanced market occurs when there’s equilibrium between the number of homes for sale and the number of buyers in the market each month.

There’s neither an excessive surplus of homes nor an overabundance of buyers.

In a balanced market, listing and sold prices aren’t rising artificially due to high demand as they do in a seller’s market. Under these market conditions, home values tend to remain the same and stay stable over time.

If a region remains in a balanced housing market long enough, home prices may increase slightly, but this is due to inflation rather than demand.

However, many areas rarely see a steady balanced market. Often neutral conditions simply serve as a transitional period while the market shifts from a hot seller’s market to a cool buyer’s market.

Selling in a Buyer’s Market

Unfortunately, if you’re listing your home in a buyer’s market, you may be waiting a long time before selling—even if you list immediately. In a seller’s market, homes sell within days or weeks. In a buyer’s market, it can take months before you see your first offer.

That’s why the number one fear of sellers facing a buyer’s market is that their home won’t sell at all. Thankfully, that simply isn’t the case. Okun explains:

“No matter what type of market it is, there is always demand for your home. Always. There are always buyers in the market. I don’t care what month, what year, what season, there are always buyers. There’s always demand for property. People always need to buy homes. Even in a very strong buyer’s market, homes still should not take more than thirty days to sell. ”

The hard truth is that, while your home will sell, it won’t sell for as much money as you might like.

The bottom line is that a buyer’s market occurs when there are many more homes available than there are buyers shopping for properties. Simple economics says that when there’s excess supply prices decrease.

While low demand will cause your home’s value and list price to decrease, there are steps you can take to ensure you get the best offer possible.

Unlike seller’s market conditions (when you can even get good offers on as-is properties), homes listed in a buyer’s market need to be the best on the block. Your home needs to be in tip-top shape just to get buyers to come for a showing, let alone attract an offer.

Okun calls these steps the three Ps, “Preparation, Presentation, and Pricing. You’ve got to bring them in the door. A home seen is a home sold.”

Before listing, do the prep work to fix your home and make improvements. Invest in staging and professional photography to ensure it presents well to potential buyers both online and in person.

Then settle on a well-researched price that takes both the Comparative Market Analysis and broader market conditions under consideration.

Follow these steps and in a buyer’s market, you’ll get a good offer in a reasonable amount of time. And in a buyer’s market, you’ll get your pick of multiple top dollar offers.

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