Being a savvy real estate buyer or seller requires that you know and understand the market conditions. This includes the types of home, comparable purchases prices, and so much more. But one of the most important factors to understand is where you are in a buyer’s market or seller’s market. The concept can be simplified to the following definitions.

Buyer’s market: Supply is greater than demand

Seller’s market: Demand is greater than supply

Supply refers to all of the homes currently listed for sale. These can include single family homes, condos, and townhouses. Demand refers to the people who are currently searching for those homes. When there are more homes than people, buyers get to be really picky because they have plenty of choices. This might result in overall lower purchase prices, more competition for sellers to make their home stand out, and longer times for homes to sit on the market. On the other side, if there are more people searching than homes available, the competition to get an approved offer can be fierce. This can result in overall higher purchase prices, buyers including fewer contingencies or asking for fewer concessions, and less time for homes to be available before an offer (or multiple) is made. It might even result in a bidding war between potential buyers!

How do I know what type of market I am in? Buyer’s or seller’s?

First, look at the homes that are currently listed for sale. If there are a lot, more than usual, you are probably in a buyer’s market. If many have been on the market for a long time, longer than a month, it is another good indication that it is a buyer’s market. In general, if the number of homes on the market divided by the number of homes that sold in the previous month is higher than 7, it is a buyer’s market. Lower than 5 indicates a seller’s market.

You can also look at recently sold homes. If many of them sold for above asking price, it is most likely a seller’s market. If they have had numerous reductions in price before they sold, chances are it is a buyer’s market.

Finally, look at the trend of purchase prices over a few months of data. If median sale prices have been increasing over time, that means that people are willing to pay more for homes, likely due to a shortage—seller’s market. If prices have been going down, there are more buyers than homes and they can afford to pass on an expensive home or offer a lower price—buyer’s market.

Working with a Realtor or real estate agent is a great way to learn more about your local market and be prepared, whether you are a buyer or seller.