Best Areas For Home Buyers, Sellers Vary By Region

Posted by: Skylar Olsen    Tags:      Posted date:  December 11, 2012  

As most housing markets continue to improve across the U.S., the relative position of buyers and sellers continues to vary considerably by geography. In some markets, buyers are finding themselves in strong bargaining positions relative to sellers, confidently paying less than the asking price on a home they had months to consider. In other markets, it’s the sellers ending their days not lamenting the one to come, selling their homes within days after bidding wars pad their pockets more than expected. With this variability in mind, we’ve developed an index to indicate the relative bargaining power of a buyer or seller within a given market, aiming to provide insight into the dynamics of this complex and shifting relationship.

We define a buyers’ market as one in which home buyers are in a position of power relative to home sellers. In these markets, homes for sale stay on the market longer, price cuts occur more frequently and homes are sold for less relative to their listing price. Conversely, a sellers’ market is one in which home sellers are in a position of power relative to home buyers. In these markets, homes are on the market for a shorter time, price cuts occur less frequently and homes are sold at prices very close to (or greater than) the listing price.

Our index is created using data on the sale-to-list price ratio, the percentage of homes that have been subject to a price cut and the time on market (measured as days on Zillow). The scatter plot in each interactive figure illustrates the close relationship between these measures. The longer homes linger on the market, the more often impatient sellers offer price cuts and the larger these price cuts are relative to the original asking price. This creates the upward sloping positive relationship between median days on market and the percentage of homes with recent price cuts as well as the clustering of larger dots (larger sale-to-list price ratios) to the lower left-hand region on the graph.

Together these three measures provide us a picture of the relative positions of buyers and sellers. The measures are converted into percentile rank, averaged together and divided by 10 to generate an index ranging from 0 (the strongest sellers’ market) to 10 (the strongest buyers’ market). At the metro level, percentiles are computed according to all other metropolitan regions, allowing the comparison between the major metros across the U.S. We exclude short sales and foreclosures.

Analyzing metropolitan areas across the whole U.S. reveals several interesting patterns. Sellers’ markets are geographically clustered in the West, while buyers’ markets dominate the East. Washington, DC is a notable exception on the East Coast with an index value on the sellers’ end at 2.6. The spatial distribution of sellers’ markets mirrors recent analysis of negative equity at the county level, suggesting that a “negative equity bubble” could be influencing market dynamics.  Households with a large amount of negative equity locked into their home are hesitant to sell, waiting for prices to continue increasing as the market improves. This creates negative equity driven supply constraints. Fewer homes for sale means more competition among buyers, leading to shorter time on market, fewer price cuts and higher sale prices relative to list price. In other words, all three of the Buyer-Seller metrics are pushed to favor sellers.

Many of the metropolitan regions hardest hit by the housing recession, and subsequently saddled with high levels of negative equity and the largest drops in inventory, are also markets in which homes appear to be selling at a relatively fast clip, with few price cuts and for close to their list price. Inventory drops are indeed much larger in the Western states, with California metros populating 11 out of the 16 metropolitan areas with the greatest reductions in homes for sale over the past year, all of which are strong sellers’ markets. Among the best sellers’ markets, Sacramento and Phoenix serve as excellent examples of hard-hit markets. The top two sellers’ markets are the expensive and economically more resilient markets of San Francisco and San Jose.

The “best” buyers’ metros are clustered in the Northeast, with New Haven, CT scoring highest on the index, followed by Poughkeepsie, NY and Stamford, CT, suggesting buyers are in a good position in these areas. The Midwestern metros as well as those in the Carolinas are mostly buyers’ markets as well, led by Chicago (Buyer-Seller Index of 8.1), Cleveland (8.0), Winston-Salem (8.5) and Burlington (8.5).

Understanding that conditions vary on an even finer scale as well, we’ve also created a Buyer-Seller Index ranking the most buyer-friendly versus seller-friendly cities within the major metropolitan areas. To assign index values to individual cities, percentiles for each variable are computed relative to other cities within the same metropolitan region, so comparisons can be made between cities in the same metro, but not between cities in different metros.

Observable patterns emerge on the within-metro scale as well, though patterns are often unique to the metro itself. For instance, in the San Francisco metro, in cities closest to the Bay sellers find themselves in strong bargaining positions, while spreading outward the bargaining position of buyers increases.

About the author
Skylar Olsen
Skylar is a Senior Economist at Zillow. To learn more about Skylar click here.