What Constitutes a Buyer's Market? - SmartAsset

A buyer’s market occurs when more goods or services are offered for sale than there are buyers to buy them. Buyer’s markets feature low prices and ample selection, which represent advantages for buyers. Sellers in a buyer’s market must confront choosy shoppers, low liquidity and difficulty selling their offerings at prices they prefer. Buyer’s markets can exist in any type of market, from housing to labor. Various formal indicators can denote the presence or absence of a market, but the basic trait is an imbalance in supply and demand, with more sellers than buyers. Consider working with a financial advisor as you face significant buying or selling decisions.

Buyer’s Market Indicators

What constitutes a buyer’s market varies depending on the field and indicators may be formal or informal. For instance, housing is often described as being in buyer’s or seller’s market mode.

Informal indicators of a housing buyer’s market can include the presence of large numbers of “For Sale” signs, sellers reducing asking prices and homes being re-listed after being on the market for a while.

More formally, economists often use the housing supply figure to determine market traits. Analysts calculate housing supply by dividing the number of homes for sale by the number of sales in the last month. If the result reaches seven or above, it’s probably a buyer’s market. Five or below indicates a seller’s market, and six is considered neutral.

In keeping with that, Federal Reserve figures show housing supply averaging 6 over several decades. Its highest point since 1963 was 12.2, reached in January 2009 during a historic buyer’s market amid the last housing crisis. The lowest, 3.5, indicating a strong seller’s market, appeared a few times during the decade leading up to the housing crisis as well as during August and September of 2020.

In the labor market, unemployment figures can get used to support a description of the market as favoring employees (buyers) or employers (sellers.) Since 1948, unemployment has averaged 5.8%. This reading is considered balanced, favoring neither employees nor employees. The strongest labor buyer’s market, with an unemployment rate of 2.5%, appeared in 1953. The strongest seller’s market, with an unemployment rate of 14.8%, came in April 2020, when pandemic economic disruption peaked.

Similarly, falling prices for hotel rooms and airline tickets caused by pandemic-related movement restrictions led to travel being characterized as a buyer’s market in 2020. In the stock market, falling prices for major indexes can indicate a buyer’s market. Used car dealers often track the conversion rate, representing the percentage of cars purchased when offered at dealer-only auctions.

Extreme examples of seller’s markets are known as bubbles. In these markets, eager buyers can drive selling prices well above the asset or item’s intrinsic value. Bubbles are by definition time-limited and usually followed by busts, when a buyer’s market re-emerges.

Buyer’s Market Importance

One of the main appeals of a buyer’s market for buyers is the opportunity to acquire desired items for less money. A buyer’s market also improves selection and availability. Buyers have more offerings to choose from and less trouble finding a purchase that fits their requirements.

For sellers, a buyer’s market means they may have to lower expectations for the selling price. They will have to compete with other sellers, and may need to offer incentives to attract buyers. A buyer’s market also can mean an illiquid market, so that it takes longer to turn an asset into cash by selling it.

Buyers in a seller’s market often take advantage of the opportunity to drive a hard bargain. Sellers in a buyer’s market may have to take what they can get. Sellers may try to spice up offerings to draw attention in a market crowded with sellers. A homeowner might, for instance, offer to throw in the appliances or bypass the inspection.

The existence of a buyer’s market can vary considerably by location and other factors. Sometimes a buyer’s market may appear for only very specialized offerings. Also, buyer’s markets are generally temporary and followed by a return to a more balanced environment.

Bottom Line

A buyer’s market is a shorthand for a situation with more sellers than buyers for a given good or service. Low prices and ready availability characterize these markets. Buyer’s markets may be strong or weak, general or specialized and short-lived or long-lasting. Exactly what constitutes a buyer’s market varies according to the item being sold. Examples of widely used indicators include housing supply for real estate, unemployment rate for labor and conversion rate for used-car dealers. The flip side of a buyer’s market is a seller’s market, in which supply and demand go out of balance the other way, with more buyers than sellers.

Tips on Personal Finance

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