Is it finally a buyer’s housing market? Or at least a balanced market? Sellers are still holding most of the cards. But there is good news for homebuyers, as the inventory picture might not be as dire as it seems. Buyers also have more leverage and a greater ability to negotiate with sellers, which is a welcome change from the hyper-competitive market of the last couple of years.
What type of market are we in?
The housing market is often characterized as a seller’s market, a buyer’s market or a balanced market using the months-of-supply metric. Months-of-supply is a measure of how long it would take for the current available inventory to sell, given the current pace of home-sales activity. It is typically calculated by dividing the month-end active listings by the average number of monthly sales over the previous 12-month period. Historically, less than five or six months of supply indicated a seller’s market, while anything over six meant it was a buyer’s market. A balanced market was one where there was five or six months of supply.
At the end of 2022, there was about 3.5 months of supply nationally, indicating a solid seller’s market. However, this measure might be understating available supply because the months-of-supply metric uses the pace of home sales from the prior 12 months, a period when mortgage rates were still around 3% and homes were still flying off the market. If a more typical (that is, lower) rate of monthly sales is used, the existing inventory would take longer to draw down, and the months-of-supply measure would be greater, perhaps even in “balanced” territory.
How are sellers reacting?
Sellers are having to give much more than they had been over the past couple of years. For much of 2021 and 2022, the average sold-to-list price ratio nationally was above 100, meaning that sellers were typically getting more than list price for their home. In September 2022, the average sold-to-list price ratio sank below 100 for the first time in 18 months. Sellers are no longer seeing multiple offers and bidding wars. Instead, they are having to entertain offers below list price in order to sell their home.
Seller concessions, which virtually disappeared in 2021, have also been returning, which is another indication that buyers have more leverage. In the Washington, D.C., area market, for example, more than 40% of transactions in the fourth quarter of 2022 involved a seller concession.
What should a prospective buyer do?
With mortgage rates stabilizing, many buyers who were sitting on the sidelines at the end of 2022 are now looking to get into the market. With rising inventory and more opportunities for negotiating, home shoppers will find the market much less competitive than it has been.
However, inventory is still tight. Buyers should be prepared to make an offer when they find a home they love. Having financing lined up and being ready to be flexible on closing are still going to be important for a successful home purchase. On the positive side, buyers should be asking for home appraisal and home inspection contingencies, and might even be able to get some closing cost assistance in this new market.
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