What is a Buyer's Market?

A buyer's market refers to a situation in which supply exceeds demand, giving purchasers an advantage over sellers in price negotiations.

Key Takeaways

  • A buyer's market refers to a situation in which supply exceeds demand, giving purchasers an advantage over sellers in price negotiations.
  • Buyer's market is commonly used to describe condition in real estate markets, but it can apply to any type of market where supply exceeds demand.
  • The opposite of a buyer's market is a seller's market, a situation in which demand exceeds supply.

Understanding a Buyer's Market

A buyer's market stems from the law of supply and demand. This law states that a supply increase amid constant demand puts downward pressure on prices, while a demand increase amid constant supply puts upward pressure on prices. If supply and demand rise or fall in tandem, prices are generally impacted much less.

A market will swing from a buyer's to a seller's market, or vice versa, when the level of supply or demand moves without a similar change in the other, or when the two move in opposite directions.

The term "buyer's market" is commonly used to describe real estate markets, but it applies to any type of market in which there is more product available than there are people who want to buy it. The opposite of a buyer's market is a seller's market, a situation in which demand exceeds supply and owners have an advantage over buyers in price negotiations.

Buyer's Market Characteristics

In a real estate buyer's market, houses tend to sell for less and sit on the market for a longer period of time before receiving an offer. The competition in the marketplace exists between sellers, who often must engage in a price war to entice buyers to make offers on their homes.

A seller's market, by contrast, is characterized by higher prices and shorter sales times. Rather than sellers competing to attract buyers, the buyers compete against one another for the limited supply of homes available. Consequently, bidding wars often transpire in a seller's market, resulting in homes selling for more than their list prices.

Buyer's Market Example

During the housing bubble of the early-to-mid 2000s, the real estate market was considered to be a seller's market. Properties were in high demand and likely to sell, even if overpriced or in poor condition. In many cases, a home would receive multiple offers and the price would be bid up above the seller's initial asking price.

The subsequent housing market crash created a buyer's market in which a seller had to work much harder to generate interest in his or her property. A buyer expected a home to be in excellent condition or priced at a discount, and could often secure a purchase agreement for less than the seller's asking price for the property.