What Is a Buyer's Market?

A buyer's market is an environment that favors buyers over sellers. It typically develops when changes to the underlying economic conditions that shape supply and demand mean that purchasers have an advantage over sellers in price negotiations.

Understanding a Buyer's Market

A buyer's market is created by market conditions that favor buyers over sellers. Anything that increases the urgency of sellers to sell or decreases the urgency of buyers to buy contributes to a buyer's market.

In terms of economic theory, this can be described using the law of supply and demand, which states that a supply increase amid constant demand or a decrease in demand with constant supply will put downward pressure on prices.

Factors that can increase supply include:

• Entry of new sellers into a market
• Decrease in demand for alternative uses for the good
• Technological improvements that lower the costs of production

Factors that can decrease demand, meanwhile, include:

• Exit of buyers from the market
• Change in consumer preferences
• Increased availability of substitute goods

By changing the shape of supply and demand in a way that implies a lower market equilibrium price, these factors can create an advantage for buyers to negotiate for lower prices.

The term "buyer's market" is commonly used to describe real estate markets, but it applies to any type of market in which there is more product available than there are people who want to buy it.

Buyer's Market Characteristics

In a real estate buyer's market, houses tend to sell for less and sit on the market for a longer period of time before receiving an offer. More competition in the marketplace occurs between sellers, who often must engage in a price war to entice buyers to make offers on their homes.

A seller's market, by contrast, is characterized by higher prices and shorter sales times. Rather than sellers competing to attract buyers, the buyers compete against one another for the limited supply of homes available. Consequently, bidding wars between buyers often transpire in a seller's market, resulting in homes selling for more than their list prices.

Buyer's Market Example

During the housing bubble of the early-to-mid 2000s, the real estate market was considered a seller's market. Properties were in high demand and likely to sell, even if they were overpriced or in poor condition. In many cases, a home would receive multiple offers and the price would be bid up above the seller's initial asking price.

The subsequent housing market crash created a buyer's market in which a seller had to work much harder to generate interest in their property. A buyer expected a home to be in excellent condition, or priced at a discount, and could often secure a purchase agreement for less than the seller's asking price for the property.

The Bottom Line

A buyer's market is an environment in which buyers have an advantage over sellers. This usually happens when demand exceeds supply. As a result, prices stay low, buyers have a higher number of options to choose from, sellers must keep prices low, and buyers have more room to negotiate. A buyer's market usually refers to real estate markets. However, it can also be used to describe any market in which buyers have an advantage. The opposite of a buyer's market is a seller's market.