A seller’s market occurs when the supply of a particular asset (usually housing) falls short of demand. As a result, sellers can demand higher prices, while buyers experience limited negotiating power.

Seller’s markets, explained

During a seller’s market, demand outstrips supply, giving sellers greater control over terms and pricing. It’s the opposite of a buyer’s market, when excess inventory hands negotiating power (and lower prices) to buyers.

Seller’s markets can crop up in the corporate world, when low supply of and high demand for desirable companies stimulates higher prices.

But seller’s markets are more often associated with real estate. These conditions are often characterized by low inventory, higher-priced homes and faster sales. Buyers compete for properties, while sellers have their pick of buyers. Bidding wars are common as buyers prepare to spend above market price or demand fewer concessions.

Potential causes include:

• A sudden influx of buyers, perhaps due to local job growth
• A drastic decrease in the number of existing homes for sale
• Fewer new construction builds, perhaps due to limited development permissions
• Declining mortgage rates

Recent examples

The most recent example of a seller’s market occurred between 2020 and 2022. As the pandemic allowed people to reconsider their lives, many moved to more desirable locations. The resulting mass migration saw housing demand in cities, suburbs and rural areas boom, outstripping supply.

As more buyers bid up prices, some sellers saw cash offers exceed the asking price by over $100,000. Real estate investors swooped in and snapped up investment properties. Construction rose, contributing to a lumber shortage.

The seller’s market receded, but didn’t disappear, when the Federal Reserve hiked interest rates to combat inflation. Mortgage rates increased, and both new construction and existing home demand declined.

How does a seller’s market affect you?

How you operate in a seller’s market depends on your role. Below, we’ll look at some basic rules of thumb.

Buying in a seller’s market

• Don’t pay more than you can reasonably afford – especially if you’re relying on financing
• Decide on a firm upper price limit before making an offer or engaging in a bidding war
• Don’t waive essential financing, inspection or appraisal contingencies that ensure the safety of your home and finances; however
• Understand that you have less leverage to push contingencies and concessions 
• Don’t settle for the next available home just to buy a home
• Most importantly, only submit an offer once you’re prepared to follow through

Selling in a seller’s market

• Don’t price your home too high – listing under market value may even kick off a bidding war
• Vet your buyers for financial stability or backing before accepting an offer
• Require preapproval for financing offers
• Consider which contingencies you’re willing to negotiate on, and which you’re prepared to walk away from

What this means for you

When buying or selling an asset, understanding current market conditions helps you navigate your transactions. As a seller, seller’s markets offer a chance to benefit from higher prices and increased competition. However, buying in low-supply, high-demand markets puts you at a severe disadvantage.