Thursday, August 10th, 2006 at 1:25 PM
What’s a Buyers’ Market?
"Buyer’s Market" is a term we’re hearing more and more, now that the real estate slowdown is making front-page news.
Here’s a definition of a ‘Buyer’s Market’:
A ‘buyer’s market’ is the psychology that causes buyers to want to WAIT AND SEE WHAT HAPPENS. Unless they find the perfect house at the perfect price, the waiting leads to indifference, which causes the fence-sitting to become very comfortable for buyers.
As a result, there is mounting pressure on sellers to lower their price, to entice the buyers off the fence. This creates the proverbial ‘downward spiral’, where each sale is lower than the one before.
This is the current state of the market, and why the number of sales has slowed considerably.
If you are trying to sell, and are determined to hold out, I’d urge you to reconsider. It can be a humiliating ride down, price-wise.
It is better to get out, than to hold out.
Posted on Thursday, August 10th, 2006 at 1:25 PM in Thinking of Selling? | 13 Comments » | 
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I should think the answer is obvious Jim. When the realtor trying to put a deal together says; "What needs to be done to make this deal happen?" Who does he turn to? Buyer/seller?
Don’t overthink this stuff.
Robert Coté | August 10th, 2006 at 7:01 pmI’m not overthinking this stuff, it’s obvious to me and you.
Apparently it’s not that obvious to those whose ego is preventing them from seeing the reality, so I’m trying my best to put it in the simplest terms possible.
You should see the fights I’ve had with sellers who are convinced I’m wrong, and they’re RIGHT!
Jim the Realtor | August 10th, 2006 at 7:12 pmHOLD OUT for what – a even lower price later?
A house is worth only what someone is willing to pay for it today, not what the seller thinks it is worth. Those days are over – that ship has sailed into the sunset. The market has turned. Sellers, adjust to the new reality of realty or watch your equity vanish.
Unfortunately, looks we will begin to see many upside-down sellers bringing a check to escrow like back in early 90′s.
I am happy to rent until prices are reduced at least 25% – 30%. Can today’s sellers "hold out" that long – I don’t think so.
Stan Rogers - San Diego CA | August 10th, 2006 at 9:04 pmFaced with the choice between changing one’s mind and proving that there is no need to do so, almost everyone gets busy on the proof.
–John Kenneth Galbraith
Jim the Realtor | August 10th, 2006 at 9:43 pmI disagree that this is a buyer’s market.
A buyer’s market is when an asset trades beneath its intrinsic value. A sellers’s market is when an asset trades above its intrinsic value.
Imagine that there are five houses for sale on a street, each with an intrinsic value of $200K. A year ago, a couple of people sold them similar houses for $400K. But now, these five houses are on sale for between $350K and $380K, and the sellers can be talked down another 10%…. but there are no buyers in sight.
That’s still a SELLER’S market.
When the price dips below $200K come back and tell me that it’s a buyer’s market.
There’s three ways to value real estate:
1. Rental rates (cap rate in investor lingo) from converting it to a rental
2. Replacement cost. (How much would it cost to acquire the land and build it)
3. How much you can sell it for.
In a fair and efficient market, all three of these values would be equal. That value is the intrinsic/fair value of the house.
Right now, #1 and #2 are way out of whack with #3.
Greenlander | August 10th, 2006 at 10:00 pmGreenlander,
You’re confusing terminology (many people make the same mistake). By definition, a buyer’s market means large inventory, little buyer interest and falling prices. This is all that it means, and nothing else. It does not mean that "it’s a good time to buy", although lots of people interpret it that way. Ironically, the time to buy is in a "seller’s market", which has low inventory and increasing prices.
Daniel | August 10th, 2006 at 10:29 pmAnd one more comment: the stock market also has names for raising and falling markets ("bull" and "bear"). Again, this has nothing to do with intrinsic value, just with the direction of the market.
Daniel | August 10th, 2006 at 10:35 pmI agree with Daniel.
The term "buyers’ market" is referring to a market psychology.
Greenie, you’re a good guy, but when you say ‘intrinsic’, aren’t you putting a universal value of $200K on the property?
I don’t think you can say there is an intrinsic, or natural, value to a piece of real estate, only what it’s worth to you at a given moment.
Jim the Realtor | August 10th, 2006 at 10:43 pmJim,
That’s like saying that the value of a stock is only worth whatever you’re willing to pay for it right now.
The correct value of a stock is the risk-adjusted future-value-discounted sum of all future earnings.
There’s no reason this same analysis can’t be applied to housing. Regardless of anyone’s emotions about a particular house, it has a rental cost that can easily determined by looking at how much similar rentals are going for. The cost of owning it is easily calculated. Therefore, it’s easy to evaluate the total expected return from owning it and decide how it compares to other places one could invest money.
The notion of intrinsic value isn’t difficult to grasp if you put your green-eyeshade-accountant hat on.
Of course, if a person’s only yardstick of value is based on market psychology, you’re going to reach a different conclusion. This is the person making the decision has no background in accounting or economics.
Daniel,
I think *you’re* the one that’s confused about terminology. Don’t worry, lots of people make the same mistake.
Greenlander | August 11th, 2006 at 12:34 amGreenlander,
You can have it your way, if you want, no problem. But there is a definition of a "buyer’s market" in RE, exactly like there is a definition of a "bear market" in stocks. In both cases, it means a falling market.
Now, you can think of a market where assets (RE or stocks) trade under intrinsic value. You can call that market whatever you wish (I don’t have a name for it). You can even call it a "buyer’s market", if you so please. But be prepared to stir up a lot of confusion if your personal definition differs from everybody else’s.
Daniel | August 11th, 2006 at 12:44 amHey – how about them Padres!
Jim the Realtor | August 11th, 2006 at 1:15 amGreenlander,
I am a bear’s bear, but have to agree with Jim & Daniel on this. A buyer’s market in RE means the psychology has basically shifted in favor of the buyers. It DOES NOT mean that it’s the time to buy. Only that the market (supply increasing and/or demand decreasing — and resultant price movements) is moving in that direction. It means the sellers no longer call the shots. It’s about time…
CA renter | August 11th, 2006 at 6:55 amGreenlander, points well noted. In regard to replacement cost, though, you forgot that the land portion of your formula is highly overvalued right now. Thus, to get back to a fair market value, i.e. where a landlord can buy and be cash flow positive on that home, many of today’s homes have to sell below replacement cost.
this is why:
1) Land is the main overvalued component today
2) Overbuilding caused tight labor supply, making labor costs higher than they should be
3) Lumber tariffs raised lumber costs from Canada in 2002, and that was a temporary price shock
4) Global boom caused inflation in commodities, making concrete, copper, etc. more expensive during the last few years.
I believe in 5 years, the construction costs will be cut by 10-15%, and the land costs will be reduced by 25-35%. Total reduction: 35 – 50%.
Buyers who don’t care about equity drops, who can afford a 30 year fixed, and whose jobs will weather the recession, can go ahead and buy. Not everyone will be a fence sitter.
The tough job for the realtors is to get the sellers to be competitive on price, and to find buyers.
powayseller | August 11th, 2006 at 4:17 pm