Hot, Cold, and Neutral Real Estate Markets
Far too few people who decide to sell or buy a home stop to take the temperature of the marketplace. They have no idea if the market is conducive to the goals at hand. That’s because most folks tend to think of their home as a place to live and not as an investment.
In reality, real estate is an investment. Like any investment, there are good times and bad times to sell. When it’s a bad time to sell, it’s usually a good time to buy. That’s why you’ll hear terms like “buyer’s market” or “seller’s market.” Another way to refer to these trends is known as taking the temperature of the market—a buyer’s market is “cold,” and a seller’s market is “hot.”
How to Compute Months of Inventory?
While it isn’t the only metric used to gauge whether it’s a seller’s market or a buyer’s market, one key term you’ll hear repeatedly is “months of inventory.” This refers to a hypothetical scenario in which no new homes become available for sale. If this happened, and buyers could only choose from the houses that are already on the market, “months of inventory” is how many months it would take to buy up every house on the market. Calculating this metric isn’t hard once you have the data:
Find the total number of active listings on the market last month.
Find the total number of sold or closed transactions for last month.
Divide the number of total listings by the number of total sales, which results in the number of months of inventory remaining.
Six months is regarded as neutral. Any more, and it’s a buyer’s market (more inventory means more options for buyers and less competition). Any less than six months, and it becomes a seller’s market. For example, let’s say there were 8,722 listings available last month. During that timeframe, 1,021 sales closed. That gives us roughly 8.5 months of inventory, making that marketplace a buyer’s market.
Buyer’s Real Estate Markets
When there are more homes available for sale than buyers to purchase them, those buyers are enjoying a cold market. Buyers have more homes to choose from, which increases the odds that a buyer will find their perfect home. When they find that perfect home, they’ll have less competition for it, which could help them avoid a bidding war.
In a cold real estate market, serious sellers are often willing to negotiate. This means you can probably buy a home for less than list price, and the seller might be willing to pay some or all of your closing costs. It’s an easier and more relaxed experience for buyers.
Signs of a buyer’s market include:
- High inventory compared to previous months/years.
- Comparable sale prices are higher than active listing prices.
- Fewer buyers are purchasing, resulting in lower closed sale numbers.
- Median sale prices are declining.
- Real estate ads are getting more ubiquitous.
- “For sale” signs are staying up longer, resulting in more “days on the market” or DOM.
- Seller’s Real Estate Markets
A hot real estate market is the best financial market in which to sell. Why? Because there are more buyers than houses available to buy.
In a seller’s real estate market, serious buyers are often willing to pay more than list price. This means you can probably sell your home quickly, and quite possibly for more than you ask for it. If your market is sizzling hot, you might be able to demand that buyers waive appraisals and inspections, although it’s always a good idea to let a buyer have a home inspection. Moreover, without waiving the right in writing, federal law says you must give a buyer 10 days to inspect for lead paint.
Signs of a seller’s market include:
- Inventory is very low as compared to previous months/years.
- Comparable sale prices are lower than active listing prices.
- More buyers are purchasing, resulting in higher closed sale numbers.
- Median sale prices are increasing.
- Real estate ads are vanishing.
- “For sale” signs are up for a few days before a “sale pending” or “sold” sign is attached.
Neutral Real Estate Markets
These markets are balanced. Typically, interest rates are affordable and the number of buyers and sellers in the marketplace are equalized. The scales don’t tip in either direction, meaning the market is normal without experiencing volatile swings. For some reason, we have not experienced neutral markets in most metropolitan areas for several decades. However, in the mid-20th century, neutral markets were more common.
Signs of a neutral market include:
- Inventory is normal as compared to previous normal months/years.
- Comparable sale prices are close to active listing prices.
- Sales numbers have stabilized.
- Median sales prices are flattened.
- Real estate advertising remains uniform.
- “For sale” signs are replaced with “sale pending” or “sold” signs within 30 to 45 days.