Understanding
the Market

A neighborhood may contain many homes, but normally only a small portion is for sale at one time. The supply of for-sale homes relative to the demand to buy them determines whether the market favors buyers or sellers. When a lot of homes are for sale, but not many people want to buy them, it’s a good time to be a buyer. This is known as a buyer’s market. On the other hand, when not many homes are for sale, but a lot of people want to buy them, it’s a good time to be a seller. This is known as a seller’s market.

Selling in a seller’s market means you have a lot of power. You might get several offers for more than your asking price. You’ll often be able to dictate the terms you prefer. You likely won’t have to fix up your home to sell it. Selling in a buyer’s market can be challenging and you should avoid it if you can. You might not get the price you want, or the price your neighbor got a few months ago for a home that’s similar to yours. You might have to make a lot of repairs and improvements to your home to find a buyer for it.

When it comes to the market you are in, there is a look of factors to go into what market is and where its likely heading. Your seller’s agent will have access to local housing market data and analyses that can help you understand market dynamics. Before you take the plunge you’ll want to know where your specific property will fit into the demand of the market and what factors contribute to its likelihood to sell. Your seller’s agent will help with this.

Median home prices can be a useful indicator of the direction of a real estate market, but this data must be analyzed with caution. The median price—the price in the middle of the market on a list of prices of sold homes—is the best general indicator of your home’s value. This means exactly half of the homes that sold were listed are above this price and exactly half are below.

While it may be tempting to track monthly or quarterly median price trends, the only valid comparison is with the same time period a year earlier. That’s because sales and prices are affected by seasonality. Prices in December, when most housing markets are slow, aren’t comparable to prices in July, when markets are closing sales from the spring home-buying season. Also, a lot can change in a year and there may be other contributing factors to consider when pricing your home. Ask your seller’s agent what they recommend and why. They may know something you don’t when it comes to the market.

Most housing markets are segmented by price bands. An entry-level condominium or small house isn’t comparable to a larger home or mansion. In some markets, high-priced homes are segmented into million-dollar and multimillion-dollar. These submarkets are important because median prices can be skewed by changes in the mix of homes sold. If an unusually large number of luxury homes sold in a specific area during a certain time frame, the median price might spike even if the overall level of prices was flat. Still, median prices can show the general direction, up or down, of housing market prices over time.

Selling when prices are rising can be wonderful and you often won’t pay attention to your price band. You may be able to list for higher, or receive higher offers, than you expected. Selling when prices are falling can be challenging. You’ll have to settle for less and price your home lower than the comparable sales data to avoid what’s often referred to as chasing the market down, with multiple price reductions as prices fall further. You’ll want to make sure that your price isn’t being skewed by a price band for the wrong reason. If this is the case, it may be worth talking to your seller’s agent about what you can do to market your property correctly.

It’s important to remember existing homes aren’t the only source of supply of homes for sale. Homes also come on the market when they’re offered by new-home builders. Newly built homes typically cost more than comparable resale homes. That premium exists because new homes comply with current building codes for safety and structural soundness, require less maintenance in the near future, and are usually more energy-efficient than older homes. A permit grants the builder permission from the local government to begin construction. A start occurs when the builder breaks ground to construct a new home. Permits and starts are good indicators of future new housing supply.

Broader economic factors like employment, job creation, household formation and wage growth also affect the demand to buy homes. When new jobs are created and companies offer employees higher pay, people feel economically more secure and better able to purchase a home. A strong local economy can be a positive factor for a strong local housing market with healthy demand and rising prices. On the other hand, when the economy is slow, so is real estate. Job losses and declining wages tend to depress the demand to buy a home. Tax incentives or lower mortgage interest rates can help to offset the effects of a weak economy.

Mortgage rates impact housing markets indirectly because interest rates are a key factor in the demand to purchase homes. When rates are rising, financing a home purchase becomes more expensive, diminishing the demand to buy. The opposite effect occurs when rates are dropping. As financing becomes cheaper, more people decide to buy a home rather than rent.

Knowing what drives mortgage rates can help you understand if they are likely to change. Many people believe the Federal Reserve sets mortgage interest rates. It doesn’t do so directly, however, there is a connection. The Federal Reserve controls the federal funds rate, a short-term rate that banks use to make loans among themselves. This rate and the Federal Reserve’s commentaries about the economy indirectly influence the overall level of market rates, including those for home loans. The mortgage rates individual home buyers and homeowners pay are set by banks, credit unions, mortgage companies and other lenders.