Buyers vs. Sellers Market

I always find it interesting when people describe a market as a ‘buyers’ or ‘sellers’ market.  Depending on where each ecosystem is in the market cycle, sure, one can certainly have a bit more leverage than the other. When there is excess supply and low demand, the buyers will have more leverage at the negotiating table; the inverse is true as well. But when a market is not polarized (e.g. after the Great Recession), this so-called leverage feels to be more hype than anything. Some of you might think I’m crazy for saying this, but here’s a perfect example. A couple has lived in a hot market for 10 years (i.e. Austin, Seattle, Denver, etc) and has been thinking about putting their house on the market. Demand is high and inventory is low. One would classify this as a seller’s market. They would stand to make a substantial profit on the appreciation-related equity they currently have in their home. They start seeing dollar signs and how they could use that ‘paper wealth’ as a down payment on their forever home in a nicer neighborhood. While this is all well and good to have big dreams, there is a key problem with this thinking. Selling in a hot market does not mean you will benefit if you plan on staying in a hot market. Let’s say they use the tax-free equity (~$200k) from selling their home and use it to buy a $1MM home. Great, they have the down payment of 20% covered, but now their monthly payment is substantially higher and overnight went from paper rich to house poor. The couple WILLING decided to get up from the ‘strong’ side of the table and go to the ‘weak’ side. I’ve seen this situation on the residential side happen all too often. Same is true on the commercial/ investment side. Someone has owned an apartment complex or office building for a decade and wants to 1031 into a bigger property to build long-term wealth. Love the idea and I plan on using this myself in a couple years, but selling in a hot market doesn’t get you much if you’re buying in a hot market. Additionally, the tax benefits of a 1031 can quickly turn into a burden when an investor feels trapped into making a poor financial decision just to kick the ‘tax’ can down the road. Unless you’re willing to change markets, asset classes or put in real sweat equity, it feels like it all comes out in the wash. Long story short, like beauty, real estate investments are all about individual’s perspective and relativity. Some might say that there are no deals in Austin because everything is too expensive for one reason or another. An investor from San Francisco or New York, however, might feel like they’re getting the deal of a lifetime. One person’s trash might be another’s treasure.