Buyer's Market: Definition, Characteristics, Example

What Is a Buyer's Market?

A buyer's market refers to a situation in which changes to the underlying economic conditions that shape supply and demand mean that purchasers have an advantage over sellers in price negotiations.

Key Takeaways

  • A buyer's market refers to a situation in which purchasers have an advantage over sellers in price negotiations.
  • When changes in markets happen that increase supply, decrease demand, or both, then a buyer's market can occur.
  • A buyer's market is commonly used to describe conditions in real estate markets, but it can apply to any type of market where conditions favor buyers.
  • The opposite of a buyer's market is a seller's market, a situation in which conditions favor sellers.

Understanding a Buyer's Market

A buyer's market stems from changes in market conditions that favor buyers over sellers. Anything that increases the urgency of sellers to sell or decreases the urgency of buyers to buy will tend to create a buyer's market.

In terms of economic theory, this can be described using the law of supply and demand, which states that a supply increase amid constant demand or a decrease in demand with constant supply will put downward pressure on prices.

Factors that can increase supply include the entry of new sellers into a market, a decrease in demand for alternative uses for the good, or technological improvements that lower the costs of production. Factors that can decrease demand, meanwhile, include the exit of buyers from the market, a change in consumer preferences, or the increased availability of substitute goods. By changing the shape of supply and demand in a way that implies a lower market equilibrium price, these factors can create an advantage for buyers to negotiate for lower prices.

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 changes to the factors which drive supply and demand give sellers 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. More competition in the marketplace occurs 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 between buyers 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 their 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.

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