"Down" and "depressed" - according to the news, that's the real estate market these days. And thanks to continuing tight credit and sluggish job growth, the United States isn't likely to see anything like a booming real estate market for many years. But although reports about today's real estate market sound grim, here's something you probably haven't heard: there's no such thing as a "bad" real estate market. Let's take a look at some of the patterns the real estate market can fall into, who is hurt by them and who stands to benefit.
IN PICTURES: 6 Tips On Selling A Home In A Down Market
Homeowners Vs. Investors
The difference between investors and the average home buyer is that investors don't have to buy a property - because they don't need to live in it. This gives them a lot more ability to profit in different types of markets, because they are able to buy when real estate prices are down, and sell when they are up. Home buyers don't have this much flexibility, but what they can take from real estate investors is how they look at the market. Like any good investor, a real estate investor looks at the market strategically, and decides whether to buy or sell based on the potential to benefit. The bottom line is, what the media is saying about the market doesn't enter into the equation. (For more insight, see 5 Things Every Real Estate Pro Knows.)
When the news is reporting grim figures about real estate and housing prices it's hard to be enthusiastic about jumping into the real estate market. But investors could have said the same thing about investing in the stock market in 2009, when the S&P 500 dropped to its lowest point in more than 10 years; however, those who chose solid companies during the low point saw major gains when the market rebounded through 2010.
A real estate buyer's market occurs when there is more property for sale (supply), than there are buyers (demand), forcing prices down. While this type of market is bad news for homeowners who want to sell their homes, it's great for those entering the real estate market. In this case, new homebuyers have the opportunity to buy properties at a low point. The lack of competition in the market will also allow them to take their time choosing a property, and provide them with some bargaining leverage.
Because in some cases home prices may not rebound for a long time, buyers need to choose their homes carefully and look for areas where homes are truly undervalued - and not just cheap. Buyers should also weigh the fact that they'll have to pay to live somewhere - whether they buy or rent - so even a property that maintains its value may provide significant savings over time. (For more tips on how to find an undervalued property, check out The 5 Factors Of A "Good" Location.)
Homeowners may also fret about this type of market, but unless they are looking to sell, they shouldn't. Sure, this affects their net worth on paper, but it's just like holding a stock in a down market: the price only matters if you plan to sell.
A seller's market is just the opposite of a buyer's market: low supply and high demand for available properties drive prices up. This is the type of real estate market the United States experienced before the market crashed in 2009, when bad loans and rising interest rates conspired to make runaway prices unsustainable. For those who managed to cash in on big gains in real estate prices by selling their homes at the peak, this was a great market. For those who were buying those homes, it was a disaster.
But just like a buyer's market can best be taken advantage of by those who are entering the market, the seller's market is best for those who are leaving it - or at least downsizing. After all, even if the value of your home increases by 100% over the time that you own it, this won't be money in your pocket if you have to buy another house in the same area, as their prices will have all increased at a similar rate. For empty-nesters who are looking to downsize (or perhaps even rent) or for those who are making a move to a less-expensive area, the peak of a seller's market is the ideal time to sell. (For related reading, see Downsize Your Home To Downsize Expenses.)
In a balanced, or neutral, real estate market buyers and sellers are equalized. This tends to happen when interest rates are affordable, but not too low and real estate sales remain stable over an extended period. This type of market doesn't offer an extreme benefit to either buyers or sellers; sellers' profit will depend on when they entered the market, while buyers can eke out a more profitable arrangement by choosing a home that may be undervalued (such as a fixer-upper). But many buyers are also just satisfied to purchase a nice home at what they consider a "fair" price.
Whether you're a buyer or a seller in this type of market, don't expect miracles: in a balanced market an accurately priced house will sell for very close to the price it is listed for. (Learn some tips on how to make more on a home sale in How Real Estate Agents Sell Their Homes For More.)
What Type of Market Is This?
The problem for many people comes in determining just what state the real estate market is in at any given time. Here are a few indicators that will help you figure it out.
-A lot of houses are on the market and staying there for an extended period of time compared to previous months or years.
-"For Sale" signs are staying up longer.
-Sale prices are declining.
-Few houses are on the market, and those that are put up for sale sell very quickly compared to previous months or years.
-"For Sale" are up for a short time before a "Sold" sign is attached.
-Sale prices are rising.
-The number of houses on the market is consistent with previous months or years (it is consistent over time).
-Turnover is stable. (Some sources say this means home sell within 30-45 days, but this may depend on where you live).
-Sale prices have flattened are consistent over time
The Bottom Line
Your home is not exactly an investment - you need somewhere to live, so you can't base the decision to buy or sell entirely on economics. That said, by being aware of what kind stage of its cycle the real estate market is in can sometimes help you find the best times to enter and exit the real estate market. The most important thing for people to remember is to look at the market objectively and strategically, because a "bad" market could just be the best thing for you.