19 Comments on “Pre Market Action”

1. Please define what you mean by “Buyer’s market.”

2. I would define “buyer’s market” as a market in which the buyer has a stronger hand in the buy/sale relationship. In a seller’s market, it is often “take it or leave it.” Now we are seeing more seller concessions on price and incentives. Sellers have to be aware that if the buyer walks away it may be a long time until another appears (though that is true in any market it is higher risk in a buyer’s market). More listings, more to choose from.

3. Isn’t it a simple problem of supply and demand? If a seller is asking too much, then there are no willing and able buyers.

   At the right price a seller can always have a “take it or leave it” attitude, and, again at the right price, the next buyer will be right in line.

   Maybe what you mean by “buyer’s market” is that in general sellers are asking too much?

4. That’s probably a fair assessment but I think there is a little more to it as well. Some might argue that the market is actually moving to neutral but as it shifts, the pressure is on sellers so it feels like a buyer’s market. The rapid run up in prices and “buy now or someone else will” has left our market is now- shifting. At what point everything begins to level can’t be predicted. It might have been yesterday. It might be months from now. We can’t tell as the data and market is not as fluid as other market (stocks).

5. I guess I would characterize it as a buyers market without a lot of buyers (when compared to the number of sellers).

   Yes, we’re going through a readjustment of prices in which sellers will have to lower their prices if they are to realistically expect to attract a buyer. However, it’s not just a matter of prices being too high – it’s also a matter of there being fewer buyers who qualify for a loan under stricter lending standards. Sure, falling prices will help more buyers to be able to qualify, but it could take a rather large drop in prices (15 to 20+%?) to really have an appreciable effect on the supply of buyers. You’ve gotta remember that we’ve gone from a situation where people could buy with 0 money down, questionable income documentation & high DTI ratios to one in which many people are going to need 10% or more down in order to get a loan (plus a favorable DTI, income docs, good FICO, cash reserves, etc) and this in a space of only about six months. I don’t think a lot of people have $30K to $70K just sitting around at this point – especially the first-time buyers. It takes time to save up that kind of money.

6. Don’t forget about the loss of the speculators. The loss of liar’s loans and neg am loans was bad enough considering they made up 46% of the demand. But add to it the loss of people from all over coming here to stand in line and buy a condo or house in the hopes of flipping it quickly are O-V-E-R.

   It’s only a buyer’s market if there’s actually buyers. At these prices there’s much fewer. If you want to see the future of Portland look no further than Phoenix or Las Vegas.

7. Charles-

   Could a market be defined as “buyer’s” or “seller’s” according to discount rates and changes in market value?

   If the change in market value of my property is greater than my personal discount rate, then I have little incentive to sell, thus it’s a “seller’s market.” Note that my Net Present Value (NPV) is maximized by holding out for a future offer, and in fact, in time a better offer will come as the market value is increasing better than my discount rate.

   If the change in market value is below my personal discount rate (such a slowly increasing market value–slow is relative to my personal discount rate–or worse a declining market value), then it might be termed as “buyer’s market,” as the longer I hold on to my property, the more I lose, on a Net Present Value (NPV) basis.

   In other words, in a “buyer’s market” the seller loses by delay, as selling prices are not increasing fast enough, or even declining in the worst cases.

   It would seem, then, that in a “buyer’s market” that a seller has an incentive to price slightly below, but very near, true market value to move the property.

   (Of course with a little work I could bridge the two together, as market values change based on supply and demand. The changing market values can then be compared to personal discount rates.)

   Is this a better analysis, rather than the supply and demand concepts above?

8. Discount rate:

   While I usually use the standard definition, as the amount d that is required to make someone indifferent between $1 now and $1+d a year from now, I think in the case of real estate where a “high” percentage of the homes are leverages that the underlying interest rate should really be considered.

   Thus we get to negative and positive leverage. If the market value is changing below the interest rate on the debt, then we have negative leveraging–a “buyer’s market” as the NPV is maximized by selling today.

   Now, I think we could add two more concepts that could differentiate “buyer’s market” from “seller’s market:”

   1. Cash flow
   2. Total Debt to market value ratio

   1. If a person does not have sufficient cash flow, then it’s probably going to be a “buyer’s market” as the buyer’s have greater purchasing power relative to sellers, based on liquidity.

   2. If the total debt to market value ratio is greater than one, then the seller will be either adding cash or selling short. A seller must be both willing and able to complete a deal. A willing but unable seller, because of underlying mortgages, might consider the market to be a “buyer’s market” as sellers cannot sell.

   This may be contrasted with loose lending standards with plenty of buyers with fists of cash trying to buy–that’s a “seller’s market.”

   Do I have something wrong here? Am I missing something?

9. TiP-

   “However, it’s not just a matter of prices being too high – it’s also a matter of there being fewer buyers who qualify for a loan under stricter lending standards.”

   To be considered a “buyer” a person must be both willing and able. It’s not enough to be willing, but unable. I would suggest a “potential buyer” is one who is able, and is willing at some lower price.

   Thus those who no longer can find or have the financial means may no longer be considered potential buyers, much less a buyer.

   It’s going to get interesting as the ARMs start to adjust! While I don’t have any good data, I suspect there is a whole class of December HATM people–those who use their home as a cosmic Santa. If the rates of these December loans adjust around December, then we should have some additional cash flow pressure being placed on many in this group.

   Maybe I should start selling lumps of coal?

10. “I guess I would characterize it as a buyers market without a lot of buyers (when compared to the number of sellers).”

    I think you are taking the phrase too literally. “Seller’s market” and “buyer’s market” are imprecise phrases just like “dark” and “light”; yet they still have meaning.

    A “seller’s market” is generally understood to be a market in which the seller has an advantage relative to the buyer. Prices tend to be higher. Note that it is not necessary that there be a large number of sellers. In fact, the more sellers there are, the less of a “seller’s market” it becomes.

    A “buyer’s market” is generally understood to be a market in which the buyerr has advantage relative to the seller. Prices tend to be lower. Note that it is not necessary that there be a large number of buyers. In fact, the more buyers there are, the less of a “buyer’s market” it becomes.

    “Buyer’s market” doesn’t mean that there are not a lot of other challenging conditions (unemployment, interest rates, etc.) that work against the buyer; it just means the buyer has an advantage relative to the seller (who, for example, is stuck making interest payments on a depreciating asset). There would almost have to be such disadvantages; otherwise the number of buyers would increase and it would cease being a “buyer’s market.” A “buyer’s market” happens precisely because there are “not enough” buyers.

11. I suggest a third market: the dead, overpriced nobody’s market where nothing is selling.

    What amazes me is how right the naysayers were and how wrong the majority was. But now we all have to suffer so that a handful got to enjoy the bubble. If I was in charge I wouldn’t be bailing the hedge funds out like the Fed is doing, I would be confiscating the wealth of the speculators, the developers and the realtors. I would turn the condo towers into homeless shelters.

    Speaking of realtors, did you see that the Oregon Association of Realtors is supporting the anti-49 people? Yes, the realtors want to see this place covered in billboards and strip malls. Talk about a soulless profession.

12. Leo-

    You make statements like, “Prices tend to be higher” and “Prices tend to be lower.”

    It begs the question, “Higher than what?” and “Lower than what?”

    And you speak of “generally understood.” How do we measure “generally understood?” I have been searching for a decent answer to the buyer’s market and seller’s market concepts, and I am yet to find any “generally accepted standards.”

    I am not sure what advantage, if any, a seller ever has. Isn’t it just a matter of supply and demand? Going back to the top, I made the claim: “Maybe what you mean by ‘buyer’s market’ is that in general sellers are asking too much?” Isn’t this the same as too much supply?

13. “It begs the question, “Higher than what?” and “Lower than what?””

    Higher in a seller’s market than in a buyer’s market.

    I don’t find it any more or any less enlightening to phrase this in terms of supply and demand. You can ask “high supply compared to what?” I would just say “too high compared to demand” but that really wouldn’t tell you anything you didn’t already know.

    “Buyer’s market” isn’t a precise phrase, like velocity or torque are. You’re not going to find a precise definition any more than for words like “light” and “dark.” I would understand a “buyer’s market” to be one where buyers are scarcer than sellers and vice versa.

    I guess I’m not understanding why we are spending this much energy discussing this very imprecise term …

14. Leo: Thanks for the lesson, but I was trying to be funny with that “buyers market without a lot of buyers” remark. I should have put a smiley there 😉

15. To be considered a “buyer” a person must be both willing and able. It’s not enough to be willing, but unable. I would suggest a “potential buyer” is one who is able, and is willing at some lower price.

    JP: right. At this point there are a lot of “people who are thinking they can be buyers” (is that precise enough?) who will find that they can’t be buyers after they have a detailed talk with a lender. Afterall, their friends that are PSU students and work part time as barristas just bought that $400K house in SE in late 2006 so it must be easy to be a buyer, right? Wrong… these folks are in for a rude awakening.

16. Leo-

    “Higher in a seller’s market than in a buyer’s market.”

    In any market for a sale to take place we need to have both a seller and a buyer. And furthermore there is no difference between the sale price and what the buyer pays.

    Supply is fairly easy to measure: Just count the MLS listings (and make some reasonable assumptions, such as the level of FSBO property). As the count in inventory increases, as we have seen in just about every major market recently, then supply is outpacing demand (this observation is made without respect to what happens to the underlying pricing), so sellers, in general, are over-pricing (at least relative to historic inventory). It might be better stated: The number of people expressing interest to sell is increasing, and these potential sellers are unable to reach agreement with the pool of potential buyers.

    Ultimately, it is my opinion that the terms “seller’s market” and “buyer’s market” are not meaningful in any way shape or form.

17. TiP-

    “At this point there are a lot of ‘people who are thinking they can be buyers’ (is that precise enough?)”

    YES! Then there are those sellers who think those who claim to be ‘buyers’ actually are…

    I spoke with a truck driver who purchased a $600,000 “short sale” at what he called a “$40,000 discount.” Now a year later he cannot aford the payments, and guess what, now the value appears to be about $40,000 less than his purchase price.

18. “Supply is fairly easy to measure: Just count the MLS listings (and make some reasonable assumptions, such as the level of FSBO property). ”

    Yes, but how do you measure demand? If you just count the number of successful transactions, then you’re back to saying that supply=number of sellers and demand=number of buyers. So in the end, you’re no better off than saying that there are more sellers than buyers, which is what some people call a buyer’s market. Either way, the price will drop, but neither method allows you to predict the amount of price drop based on the gap between supply/demand or seller/buyer.

    Ultimately, I agree with you that buyer’s/seller’s market aren’t any more meaningful that the “law” of supply and demand: they both state fairly obvious things in a non-quantitative manner.

19. Enjoy: