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The ‘When’ and ‘How’ of a Buyers Market

If you are an active Real Estate Investor in Austin Texas, you have inevitably heard that we are edging closer and closer to a Buyer’s market. By rigid definition, a Buyers market is when the supply of homes exceeds 6 months the average absorption rate. To clarify, if the total supply of homes in Austin Texas is say, 10,000 and, on average 2,000 homes a month are closing, we would have a 5 month supply of homes, thus a Sellers market. If only 1000 homes a month on average were closing, we would have a 10 month supply, therefore a Buyer’s market. The general consensus for Austin Real Estate is somewhere between 7-8 months supply, though there are several pocket areas in town that are holding up much better for the moment.  If indeed we are to officially enter a Buyer’s market, why not buy everything in site until it becomes a Sellers market, and then simply sell everything you own? Seems prudent… The natural hesitation of course, is price. Price is the last variable to change when the market transitions from a Sellers market to a Buyers Market. Sometimes, a Buyers market can persist for 6 months or longer before meaningful price declines become evident. Then the question becomes how long will the Buyers Market continue and how far will prices decline. Price is stubborn. Seller’s have a hard time conceding price discounts, particularly in the early stages of a Buyer’s Market and an even harder time conceding deeper price discounts as the Buyers market continues.

The down side for Real Estate Investors in a Buyer’s market (and further evidence that we are moving there now) is the inability to efficiently “flip” properties, therefore, rental analysis should become central in our decision to buy. We must be willing to entertain landlord status, a life change that requires careful thought. Once a Buyer’s market is first seen, real estate typically moves through stages, depending on the severity and longevity of the Buyers Market.

Stages of a Buyers market

• Seller begin offering minor concessions…..(offer to pay Buyers Closing Costs)

• Lenders willing to entertain Short Sales and other creative financing arrangements to move property

• Meaningful Price Concessions for Cash offers, no contingencies.  (10%-15%)

• Deep price concessions for Cash only offers.  (15%-30%)

• Deep price discounts accompanied with Owner Financing. Buyer name your price and terms.(Capitulation)

For Seller’s, these stages are painfully revealed as the market falls.  Your job as a Real Estate Investor is to gauge where the market is in the downturn and make a judgment call as to how severe the market decline may/will be. One thing you can count on…whether up, down, or sideways, the market will move relatively slow. No need to be in a hurry. Keep your eye on the overall supply and absorption rate of homes in the specific neighborhoods and areas you specialize in. Supply and Demand is always the best gauge for effective forecasting.  When overall supply reduces by 20% and prices remain flat, the bottom is near.

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