You hear it on the news all the time: “It’s a buyer’s market,” It’s a seller’s market,” or “The housing market is on the rebound.” And while you probably get the gist of what these folks are talking about, having a deeper understanding of the housing market and how it works can help you immensely during the home-buying or selling process.

Let’s start with the basics
The housing market refers to the general market of houses being bought and sold between buyers and sellers. Like any market, the housing market is governed by the law of supply and demand. When demand is high and supply is low, the market appreciates. When demand and supply is high, the market depreciates.

How inventory affects value
In the real estate industry, we think of supply and demand in terms of available inventory. You can measure inventory by answering the following questions: At the current pace of sales, how long would it take all of the houses available on the market to be sold? In Colorado, we currently have a strong seller’s market, as the average Days On Market (DOM) in the metro Denver area has been in the 40s. It is widely accepted that DOM of less than 6 months is a seller’s market, whereas DOM of greater than 6 months is a buyer’s market.

As inventories rise, home prices tend to decline. This is because as inventories rise, so does the competition amongst sellers, which drives prices down.

The difference between a buyer’s and seller’s market
A buyer’s market is associated with longer inventory periods. As homes sit on the market for longer and longer, sellers become more and more flexible with their prices. This is great for buyers, as they usually end up getting a good deal (hence the term “buyer’s market”). In contrast, a seller’s market is associated with shorter inventory periods. Homes sell rapidly, giving sellers a lot of pricing power (hence, it’s a seller’s market”).

Keep in mind that, as with other markets, the housing market is cyclical: There are periods of rapid appreciation followed by periods of stabilization or depreciation. By studying the market, you can learn to foresee such trends.

For more real estate tips and advice tailored to your specific needs, don’t forget to reach out to your local realty specialist!