A Common Market : Buying a Home
Auctions are much more common than the average person would expect. However, they happen all around us, bringing together sellers and buyers. The real estate market can be a very competitive place depending on whether the potential buyers or sellers are dominating. There are two major scenarios that can influence how an individual navigates the real estate market whether that be as a buyer or seller. For example, let’s say the individual is looking to buy a property. It is very important to first determine whether the real estate market is currently in a buyer or seller marketing state.
In a buyers market there is excess supply compared to demand. Inventory of houses is high, but there is a shortage of interested buyers, leaving the sellers forced to respond. Buyers hold leverage over the seller, causing realtors to compete with one another in order to attract buyers to their house. This leads to a descending bid, where the real estate prices decrease until someone is willing to accept the price. Buyers gain a huge advantage in this situation because if the price of the house was originally above their given value they are able to force the hands of the seller into dropping the price down to match their value or potentially even lower to gain a payoff. This is an ideal time when purchasing a new home since there are fewer buyers to compete with and sellers are decreasing prices.
Now in a sellers market, this is where demand exceeds supply. There is an overflow of interested buyers but the inventory of real estate is low. Now, the seller holds the upper hand while buyers compete against each other in order to purchase the house. Buyers are willing to spend more than their original value of the property in order to win the bidding; therefore, sellers can increase their asking price. This type of market often leads to “bidding wars” which corresponds to an ascending bid: price increase until only one buyer is left. Being a buyer in this situation is deficient because you are unfortunately at the will of the seller. The individual will be left either paying their original value or having to buy above their current value. That is why in this scenario it is a dominant strategy for the buyers to bid their original value.