- The Washington Times - Thursday, September 22, 2005

With all the talk of a real estate bubble, it makes a lot of people wonder when, exactly, it turns from a seller’s market to a buyer’s market.

The elusive bubble the media discusses has not evolved yet. I did some research and found the first mention of overinflated properties back in 2001 when RealtyTimes.com columnist Broderick Perkins interviewed several real estate bubble-watchers to find out their definition of a seller’s versus a buyer’s market.

Simply put, you know you’re in a seller’s market when the buyers have little or no power in the negotiating arena during the sales process. These bubble-watchers were defining a buyer’s market as a market where there was a certain amount of inventory on the market, generally upward to nine months’ worth of homes. Some brought it down to as low as three months, and others pegged it right in the middle at six months.

I would default to the lower end — three to six months of inventory. At this level, while buyers are not in absolute control of the market, if sellers prepare the house well and price it right, they’ll find multiple buyers at the door. However, all things being equal, a house will linger on the market and sellers will be more willing to provide subsidies and drop prices.

The way you determine this supply of inventory is by dividing the number of homes on the market in a given month by the number of houses sold that same month. Example: Of 5,000 houses on the market, if 2,500 of them sell, it equals a two-months’ supply of homes, meaning that if no other houses come on the market, all the houses will be sold within two months.

Generally, here are the characteristics of a seller’s market:

• Booming local economy. Local businesses are hiring at a brisk pace. New companies are opening shop.

• Low existing housing inventory. More jobs are coming into a market where there’s not enough inventory to house all the workers, thus creating financial pressure on local resale units.

• Low home production. Builders are not producing enough homes to fill the job base. In the Washington market, for instance, the local economy is pumping out more than 80,000 jobs in 2005, yet only about 35,000 houses are coming on line during the same period of time.

• Higher prices. Home sales prices are escalating. During the last several years, the national increase has been in the 5 to 7 percent range. In a seller’s market, it’s not unusual to experience double-digit increases. Some communities could double in price in just a year or two.

• Contingency waivers. Buyers want to purchase a house, period. They no longer offer under list price, ask to sell their house first before settlement, or try to buy without financing already approved. There is no negotiating for the “perfect” terms. Getting the house is the perfect term.

• Seller subsidies disappear. While buyers used to ask for some sort of assistance — lower price, points paid, closing costs — the buyers must come to the table without any help from the seller.

• Higher down payments. Buyers benefit from high appreciation and begin bringing down payments such as 25-plus percent to the transaction.

• Appraisals diminish. With down payments of $100,000-plus, there’s plenty of equity coming to the table to ease the risk factor for most lenders, so that the appraised value is not as important as the actual purchasing price. If the appraisal comes in $20,000 less than asking price — that’s OK because the buyer has enough cash to compensate for the lower value.

The buyer’s market would look like this:

• Job growth eases. Job losses are possible. Local companies are closing, a particular sector goes bust or there are no longer enough people in town to support the local housing inventory.

• Inventory rises. More houses appear on the market as people move out of town to find jobs elsewhere.

Builders, who may have been building homes in the tail end of a seller’s market, may find that they are now stuck with speculation homes they can’t sell.

• Foreclosures increase. This creates a new venue of market with investors moving in to find good deals.

• Values diminish. Home prices begin to depreciate, and some homeowners will find themselves “upside down” in their property — owing more on the house than what it’s worth.

• Equity falls. Some sellers may have to come to the table with money to sell the house instead of reaping a large amount of equity. Some sellers will opt for a “short sale.” They take action to return the property to the lender instead of filing foreclosure.

• Starter homes. A first-time buyer market emerges as the once-high prices drop to a level where some can afford to purchase now. This will bring about the use of low- to no-down payment mortgages in a market where they can negotiate the use of such mortgages.

• Seller subsidies increase. Buyers once had to turn over first-born children to the sellers. Now it’s the other way around. Price cuts, closing-cost assistance and other seller subsidies become the norm.

If you noticed, interest rates and the prices of houses did not determine a seller’s or buyer’s market.

Some of the hottest markets in the past existed in high-priced and high-interest-rate environments.

M. Anthony Carr has written about real estate since 1989. He is the author of “Real Estate Investing Made Simple.” Post questions and comments at his Web log (https://commonsensereal@estate.blogspot.com).

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