What Is a Soft Market?

A soft market is a market that has more potential sellers than buyers. A soft market can describe an entire industry, such as the retail market, or a specific asset, such as lumber. This is often referred to as a buyer's market, as the purchasers hold much of the power in negotiations.

Key Takeaways

  • A soft market has more sellers than buyers and low prices.
  • Sellers compete among themselves to provide goods and services to buyers.
  • A prolonged soft market in multiple industries can lead to a recession.

Understanding Soft Market

A soft market can lead to rapid drops in prices as sellers compete to find buyers. Prices will fall as the excess of supply over demand increases. For example, assume that 20 houses are put up for sale and 15 possible buyers enter the market. Five of these houses will not be sold, assuming each buyer purchases one house. This forces the 20 house sellers to compete on price to attract a buyer. As a result, this type of housing market is called soft.

Implications of a Soft Market

Different industries may experience distinct effects from their respective soft markets. If the insurance industry faces a soft market, for instance, insurers may have to offer lower premium rates, make underwriting easier by diminishing the criteria, and offer expanded coverage to attract customers who are shopping around. The opposite of a soft market in the insurance industry is a hard market. The latter is characterized by competition among buyers and low fund availability among insurance companies. Thus, insurance companies tend to be selective about who they will provide insurance to and generally avoid high-risk cases.

If a soft market occurs among auto dealers, prices for cars may drop, along with the requirements needed to qualify for financing. Dealers may try to make up the difference on their narrower margins through higher volume sales. Lower prices due to soft markets means more customers might go shopping for a vehicle; however, they could also visit multiple dealers even with low process.

In almost every case or type of soft market, the seller must look for ways to remain competitive among their peers. Prolonged soft markets can lead to numerous negative effects on the economy. Products and services may be drastically undervalued due to plummeting prices, which, in turn, can affect commissions and salaries. Competitive efforts among businesses that include overly lenient lending requirements can lead to borrowers taking on more debt than they can afford to playback.

Industries can also suffer long-term effects if soft markets last for extended periods. Businesses may face lost earnings that force them to lay off staff or close operations because of unsustainable revenue and earnings rates. If multiple industries are struck simultaneously with soft markets, there may be broader issues about the fundamentals of the economy. A widespread downturn could be developing that leads to stalled activity or a recession.

Eventually, the soft markets should stabilize as supply and demand normalize, and pricing moves back within expected parameters.