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SHOW NOTES FOR EPISODE 242: FINDING A BUYER’S MARKET IN A SELLER’S MARKET
You can always find great property deals in a buyer’s market, but what happens when you’re in a seller’s market. In this podcast episode, Bill shares how you can still find a buyer’s markets within a seller’s market, if you just know where to look.
UPDATE
- Quest for apartments. We don’t want to compromise our criteria and “buy just to buy,” with the exception of one thing – the number of units!
- Contest reminder: Trying to get as many people as possible to rate and review the show. Will read your comments on the air and all who submit ratings/reviews will be entered in a contest for a great prize to be disclosed next Friday!
INTRODUCTION
- Last FFF I spoke about buyers and sellers markets and how we are in a seller’s market nationally
- But I also said there is no national market
- Why, because there are only many regional markets
- However, when there are trends that are occurring in many different markets, people will say those trends are what’s happening nationally, although there may still be a number of markets that are doing different things. If you get what I’m saying.
- Well, if that’s the case, then in this current seller’s market, where are the buyer’s markets? (I’m going to show you 20 in this podcast!)
- But first, let’s take a look at what a buyers’ market is…
What Is a Buyer’s Market?
A buyer’s market occurs when the housing market favors property buyers. The market is a buyer’s market when property prices are relatively low and there are a large number of homes for sale available to real estate investors. Real estate agents and experts generally use a six-month sale to determine whether a market is a seller’s market or a buyer’s market. So, when a enough investment properties in a certain market take more than six months to sell, then the market tends to be a buyer’s market.
Another method to determine the state of the market is by looking at the ratio of sales to property listings. A buyer’s market is characterized by a ratio of fewer than seven sales per every 20 listings, so that the percentage would be below 35%. Thus, we can conclude that supply and demand are two major factors that determine a buyer’s market. Because supply and demand are always changing, markets can transform from a buyers’ market to a sellers’ market or vice versa very rapidly. If you want to make money in real estate and buy an investment property at a good price, then you should definitely do so in a buyers’ market.
Factors That Determine if it is a Buyer’s Market or a Seller’s Market
Inventory
Inventory is one indicator of whether or not a market is a seller’s market or a buyer’s one. The US housing market has had 1.23 million property listings as of January 2018. This is 8% lower than last year. Because fewer investment properties are available on the market, a real estate investor selling an investment property has more negotiating power than one buying an investment property.
Days on the Market
Let’s take a look at another indicator, days on the market! The amount of days a property stays on the market shows a high demand for housing. In the US housing market, as of January 2018, the average days that a property is on the market is 89 days. This is 7% lower than that of 2017. The decrease in the number of days a property is on the market shows a high demand for housing and rental properties.
Median Property Price
Lastly, the median property price is another indicator of whether a market is a buyer’s market or not. In January 2018, the national median house price was $269,500, 8% higher than that of 2017. The increase in median house price can be contributed to two factors: a stronger demand for housing (given that properties stay on the market for a shorter period of time this year than last year) and a shortage of homes available.
These numbers all point to a seller’s market for the US housing market. Real estate investors selling investment properties are at an advantage amidst low interest rates, short inventory, rising median house prices, and fewer days on the market.
So, if that’s the national situation, how is someone supposed to find a buyer’s market?
What Factors Should You Consider When Searching for a Buyer’s Market?
Here’s 3 factors you need to consider when searching for a buyer’s market:
- Seasonality: Because the real estate market goes up and down depending on the season, picking the right season can save you a lot of money. Usually, there are a lot more homes for sale in the summer months of June through August than any other time. That being said, the market is typically a seller’s market in the winter but a buyer’s market in the summer. So, if you are looking to buy an investment property, do so in the summer. Of course, this can differ from one real estate market to another.
- Job Growth and Growing Industries: An area with a lot of jobs available and growing industries will often be a seller’s market. The more jobs, the higher the demand for real estate, thus the higher the selling power.
- Inventory: Another important factor to search for is inventory. If inventory is low, then the market is most likely a seller’s market. Try to look for a location where inventory is high (or at least higher than the national average). The more homes for sale, the stronger the purchasing power of home buyers.
While these factors help you determine if a market is a buyer’s market, you also should consider and exhaust all factors that could contribute to a market being a buyer’s market. These include mortgage and interest rates, construction efforts, and price-to-rent ratio.
Another realtor.com survey looked at markets with declining home prices.
Even as home prices continue to rise across the country, they aren’t soaring everywhere according to a study by Realtor.com, which found 10 metros where home prices have actually seen a decline.
Of the 350 metros that Realtor.com studied, it found that prices were actually falling in 27 and in each case the decline was led by reasons such as overbuilding in a boom market, mass layoffs or a company closing amid oil-related downturns or a spate of natural disasters.
For the study, the team at Realtor.com compared 12-month periods from May 2016 to April 2017 and May 2017 to April 2018, before ranking the metros that saw the biggest declines in prices.
Topping the list of cities where home buyers could get a home at a discounted rate was the
- Santa Maria-Santa Barbara, California, that used to be one of the most expensive markets in the Golden State before a spate of natural disasters saw home prices dropping 11.7 percent. Today, the median home price in this area is $951,000 as home prices are being marked down from their previous highs.
- Pottsville, Pennsylvania With a price drop of 8.1 percent and a median home list price of $72,300, Pottsville in Pennsylvania was second on this list led by high unemployment rates and buyer interest in new construction, which is hard to come by in a city that mostly has older Victorian residences available for sale.
- Napa, California – Wine country in California may not be associated with price declines but again the wildfires of 2017 that destroyed much of Napa means that the city ranks third on the list where home prices are declining. With a median home list price of $823,000 and a 6.7 percent fall in home prices means that what were once luxury homes selling for between $1.5 million and $2.5 million are now being sold and discounted rates.
- Austin, Texas – With a price drop of 4.3 percent and a median home list price of $373,000 Austin, Texas was fourth on this list thanks to a surplus of housing that was built over the past few years. Beckley, West Virginia, rounded off the top five with a median home price of $134,000 and a price drop of 4.2 percent.
- College Station, Texas (3.6 percent drop)
- Corpus Christi, Texas (3.1 percent drop)
- Anchorage, Alaska (3 percent drop)
- Houma, Louisiana (2.7 percent drop)
- Bismarck, North Dakota (1.8 percent drop)
These top 10 cities have the highest decline in home prices.
In another Realtor.com survey, they looked at cities where home buyers’ credit scores were exceptionally low as another indicator of a buyer’s market
Credit Challenged Buyers
To find out where credit-challenged buyers lived out the American ideal of home ownership, Realtor.com researchers calculated the share of mortgages in the largest 200 metros* obtained with a 649 FICO score or lower. Now, you know, it’s one thing for a lender to lower standards for car loans or for 0% credit cards, but for mortgage lenders to lower THEIR standards, things must be pretty desperate in that market.
Here are 10 different cities where mortgage lenders’ standards were lowered so that local residents can buy houses (and they, of course, can sell mortgages).
The share of mortgages was calculated over a 12-month period from July 2017 through June 2018. And they limited rankings to one metro per state.
1. Charleston, WV
Median home list price: $147,300
Share of borrowers with a 649 FICO score or lower: 39.1% (nearly half)
Although the state capital of West Virginia is a college town, the city’s overall population is aging. There’s been a big decline in chemical industry or coal jobs. That’s caused many folks to put their homes on their market.
This has opened the door for first-time buyers seeking move-in ready, three-bedroom homes near downtown. These single-family homes start around $130,000, but can be found for less.
They have a buyer’s market and many motivated sellers.
The affordable prices have led to an increase in young buyers, ranging in age from 22 to 35 (Millennials, who aren’t buying homes in many other markets because of soaring student loans and early career paychecks), who take advantage of the lower credit scores required for special USDA and FHA loan programs, whose lower standards and low down payment requirements are ideal). Most just don’t have the credit history or scores to get into other kinds of more traditional loans.
2. Clarksville, TN
Median home list price: $209,950
Share of borrowers with a 649 FICO score or lower: 35%
This quiet, family-friendly town along the Kentucky border is best known as the home to the U.S. Army base Fort Campbell. (It’s also just 45 minutes away from Nashville – one of the hottest seller markets in the country.) So, it makes sense that many folks are becoming homeowners with the help of Veterans Affairs loans, which require a minimum credit score of just 620.
Entry-level, three-bedroom, vinyl-sided ranch homes in suburban areas near the base run from about $100,000 to $130,000—a fraction of the national median home price, just below $300,000.
3. Corpus Christi, TX
Median home list price: $239,750
Share of borrowers with a 649 FICO score or lower: 35%
Corpus Christi has plenty of attractions for buyers: It sits on a large, shallow bay that attracts a diverse flock of water birds, songbirds, and raptors. This helped it earn the title of—you guessed it—“America’s birdiest place,” according to the San Diego Audubon Society. There are plenty of jobs in the medical, oil refinery, construction, and, with nearby tourist destinations like Mustang Island, hospitality industries.
Yet the city has the fifth-lowest credit scores in the United States, with an average of 638, according to a report by Experian.
That hasn’t stopped people from buying houses. Buyers can still find 1,200-square-foot starter homes for under $160,000 in desirable areas within Corpus Christi like Del Mar and Lindale.
In addition to FHA loans, the city promotes multiple locally and federally-funded home buyer assistance grants that help out buyers with down payments of up to $10,000. Not bad!
4. Lakeland, FL
Median home list price: $229,500
Share of borrowers with a 649 FICO score or lower: 30.4%
The citrus groves and cattle ranches that used to occupy much of the land around Lakeland has been gradually overtaken by 55-plus communities and housing developments for young families. That’s because housing prices have been soaring in nearby cities such as Tampa, where median home prices are $266,250, and Orlando, at $260,000, according to realtor.com data.
“Someone with poor credit … has to go where the [home] prices are lower, ” says Monique Youngblood, mortgage broker with US Mortgage Lenders. “Florida is getting really expensive, and prices in Lakeland are still pretty decent.”
Buyers can find new homes in South Lakeland for around $180,000. Older properties from the 1970s start around $140,000. To afford them, most of buyers are using FHA loans that require only about 4% or so down of the purchase price.
5. Augusta, GA
Median home list price: $218,000
Share of borrowers with a 649 FICO score or lower: 26.5%
It’s easier to become a homeowner in Augusta, on the banks of the Savannah River, because home prices are just so much cheaper here than in much of the rest of the country.
Three-bedroom, two-bathroom homes in the millennial-friendly neighborhood of National Hills, right near the prestigious Augusta National Golf Club, can be picked up for $100,000 to $150,000. That’s good news for young buyers, many of whom haven’t had the time to build a strong credit history.
Local lenders offer competitive loan programs encouraged by the Community Reinvestment Act, designed to help buyers in low- to moderate-income Census tracts. Those programs require a minimum credit score of 620 and can include 100% financing for those who qualify.
“I do as many of those as I can,” says Brandon Mears, mortgage loan officer with South State Bank. “It’s a really great program for kids just coming out of college.”
Rounding out the metros with the highest share of mortgage borrowers with poor credit are
6. Evansville, IN(at 26.3%)
7. Tuscaloosa, AL(at 25.2%)
8. Rockford, IL(at 25%)
9. Youngstown, OH(at 24.9%)
10. Kalamazoo, MI(at 24.4%).
As a savvy real estate investor, distinguishing between a seller’s market from a buyer’s market is key if you want to find good deals. A market with low inventory and demand exceeding supply makes for a great market for sellers. While a buyer’s market with high inventory and supply exceeding demand is ideal for real estate investors looking for good deals.
Make sure to exhaust all factors that contribute to the market being a buyer’s market before you consider real estate investing.
Well that’s it for today…
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