In sellers’ markets, increasing demand for homes drives up prices. Here are some of the drivers of demand:
- Economic factors – the local labor market heats up, bringing an inflow of new residents and pushing up home prices before more inventory can be built.
- Interest rates trending downward – improve home affordability, creating more buyer interest, particularly for first-time home buyers who can afford bigger homes as the cost of money goes lower.
- A short-term spike in interest rates – may compel “on the fence” buyers to make a purchase if they believe the upward trend will continue. Buyers want to make a move before their purchasing power (the amount they can borrow) gets eroded.
- Low inventory – fewer homes on the market because of a lack of new construction. Prices for existing homes may go up because there are fewer units available.
4. What Is a Buyer’s Market?
A buyer’s market is characterized by declining home prices and reduced demand. Several factors may affect long-term and short-term buyer demand, such as:
- Economic disruption – a big employer shuts down operations, laying off their workforce.
- Interest rates trending higher – the amount of money people can borrow to buy a home is reduced because the cost of money is higher, thus reducing the total number of potential buyers in the market. Home prices drop to meet the level of demand and buyers find better deals.
- Short-term drop in interest rates – can give borrowers a temporary edge with more purchasing power before home prices can react to the recent interest rate changes.
- High inventory – a new subdivision can create downward pressure on the prices of older homes nearby, particularly if they lack highly desirable features (modern appliances, etc.)
- Natural disasters – a recent earthquake or flooding can tank property values in the neighborhood where those disruptions occurred.
