There are many factors that influence the housing market, including mortgage interest rates, inflation, employment, construction, government assistance programs, and more. The health of local and world economies is also a major factor, and like the other factors, affects the supply and demand of the market which, in turn, affects housing prices.
When discussing supply and demand in the housing market, there are three categories typically used to describe the climate. These are general classifications, and anomalies will always be found within them.
A seller’s market is when there are more people looking to buy then there are homes available. This causes a rise in price above the long-term average rate of inflation. Typically this is indicated by a sales-to-active listings ratio of 20% or higher.
A buyer’s market is when there are many more homes for sale than there are buyers. As a result, prices increase slower than the long-term average rate of inflation. In extreme circumstances this can cause prices to decline. Typically this is indicated by a sales-to-active listings ratio below 12%.
A balanced market occurs when supply and demand are about the same, with home prices rising in line with long-term average rate of inflation. Typically this is indicated by a sales-to-active listings ratio between 12% and 20%. As mentioned earlier, anomalies can often be found. For example, there are times when it may appear to be a seller’s market within a specific price range – say the $200K to $400K range, and a buyer’s market in higher ranges. If that is the case, some experts will tell you that as demand increases or decreases in the higher ranges, that same trend will eventually trickle down to the lower ranges.
Over a sustained period of time:
- a seller’s market is represented by a ratio of 20% or higher
- a buyer’s market is represented by a ratio of 11% or lower
- a balanced market rests between 12-19%