In 2006 I wrote a column cataloging eight early warning signs that your market was heading into a downturn. By the same token, shifts in those same signs can herald a seller’s market in the near future.
Are you hoping that the dreadful buyer’s market is finally behind you? If things still seem tough, here are eight early warning signs that your buyer’s market is about to disappear and that a seller’s market is around the corner.
1. The most important predictor: months of inventory
Of all the factors that you could use to predict what will happen in your market, months of inventory is the most accurate. The amount of inventory will begin to decline six to 12 months prior to the time that people first begin noticing that the market is improving.
In terms of where you are in your market, if you have six or fewer months of inventory, you are in a seller’s market. If there are seven or eight months of inventory, you are in a transitioning market. If there are more than eight months of inventory, you are in a buyer’s market.
An important point to note is that when you track how much inventory is available, do it by specific area and price. It’s common for the same market to be experiencing a strong seller’s market in the lower price ranges while having a buyer’s market in the upper price range.
2. Builders eliminate incentives
Generally, builder behavior is an excellent barometer as to what is coming in the general resale market. When the market activity slows down, builders increase their incentives and often increase the commissions they pay to cooperating agents. When demand increases, the incentives go away. In many cases, so do commissions to cooperating agents. In extremely strong seller’s markets, it’s common to see lotteries for new houses.
3. Multiple offers
The hallmark of a seller’s market is multiple offers, often with the seller obtaining more than the asking price. If you have been in a market where there have been virtually no multiple offers, take note when you start hearing regular stories about how an agent lost out during a multiple offer. As multiple offers increase, prices normally start to increase as well. Consequently, if properties are selling at close to asking price or more, your seller’s market has arrived.
4. Decreased days on market
A quick way to spot market shifts is to track days on the market. Check this number at least monthly. If there is a major shift in this statistic, determine whether a change in strategy is necessary. Decreases indicate a trend towards a seller’s market where there will be less inventory and higher prices. If you haven’t yet seen a full-blown seller’s market in your area and you observe that days on market is dropping dramatically, it’s time to start calling all those potential sellers from over the last six years and to persuade them to list now.
5. Decreased commissions
When there are too many buyers, properties often sell so quickly that some sellers decide that paying an agent a full commission is unnecessary. After all, the agent didn’t have to work that hard to sell the property. Agents become aware of this trend and often begin cutting commissions as a way to close sellers on listing with them. This trend also results in more for-sale-by-owners as well as more flat-rate and limited-service real estate companies who hope to capitalize on the commission-cutting trend.
6. "Flipping" makes a comeback
Flipping (buying a property, fixing it up and selling it for a profit in a short period of time) once again becomes irresistible, especially when prices are rising rapidly. This trend is another harbinger of a seller’s market, with the trend normally peaking just prior to the next downturn.
7. Foreclosure rates decrease
The decline in the foreclosure rates began in earnest in many areas back in 2011. The flood of foreclosures has dropped to a trickle in many areas. Leslie Appleton-Young, chief economist for the California Association of Realtors, noted that the California market began its upturn in 2009. In other words, the raging seller’s market that state is currently experiencing has been in the works for almost four years.
8. Second-home sales increase
The second-home market has been languishing since 2006 in most areas. This is a part of the market that can expect explosive growth for two reasons. First, the overall market improvement will drive demand for these properties as well as possibly resulting in some appreciation. More importantly, the peak of the baby boom generation occurred in 1960. The statistics show that the prime time that people purchase second homes is when they are between the ages of 50 and 60. This means the largest age cohort within the baby boom generation is at the age where they are the most likely to purchase a second home.
Again, be sure to track the specifics of your local market, especially in the price ranges and areas where you specialize. If you see a major inventory drop, get on the phone and contact all those potential past sellers who couldn’t sell in the previous market. Chances are that if you’re in a seller’s market, they will be able to sell now!