3 Signs a real estate market correction may or may not be happening

There are fewer homes sold

The first sign that a real estate market correction is happening is that there are fewer homes being sold. Now we aren’t just talking about seasonality. It’s normal for more homes to be sold in the springtime than the summer. We’re talking about seasonally adjusted home sales. This means taking into account how many homes are normally sold in any given month.

When home sales are down when seasonally adjusted, as well as home sales are down year over year, it’s a clear sign that a housing market correction may be happening, and this makes perfect sense.

Think about it. If real estate suddenly didn’t become as attractive due to higher mortgage rates and/or a slowing economy, fewer people would buy homes. This would show up in the home sales numbers.

Although we can’t expect a new record for homes sold each and every year, when home sales are sharply down several months in a row, there’s a strong indication that a correction may be occurring.

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The number of active listings is up

The number of active listings Is an important sign of any healthy real estate market. You want there to be enough active listings to satisfy interested homebuyers. Otherwise, you get what Toronto and Vancouver had been experiencing for quite some time, a seller’s market.

A seller’s market is no fun for buyers and sellers alike. It’s no fun for buyers because it means that there is a scarcity of listings, resulting in higher home prices and more bidding wars. It’s no fun for sellers because if you’re a seller who wants to buy a home first before listing your property, this can only add to the lack of active listings.

When there are roughly the right number of buyers and sellers, we get what is called a balanced market. This means that there is no clear advantage for buyers or sellers. Both buyers and sellers are pretty evenly matched.

Then we get what is called a buyer’s market. This is a clear indication that a market correction is upon us. With a buyer’s market, the supply of homes for sale exceeds the demand. Under this scenario, the number of active listings would go up, as there aren’t enough interested buyers to purchase them.

A buyer’s market can be especially problematic if you chose to buy a home first and sell after. When the market turns like this, you could be caught in between a rock and a hard place. You could be forced to sell your home for less than you planned to. If that happens, it’s a clear sign a correction is underway.

Days on market

Closely related to the number of active listings is days on market. Days on market is simply the number of days an active listing remains on the market before selling.

Seller’s Market

In a seller’s market, when there are more buyers than sellers, days on market tends to be a lot fewer. The reason for this is that when a new listing comes up, everyone rushes to make an offer on it. Some people even make pre-emptive offers and the property is sold before it officially goes for sale on the MLS.

Balanced Market

In a balanced market, buyers have more time to think about a property. In a balanced market, days on market might be between 20 days and 30 days.

If a real estate market correction is underway, that’s when you might see days on market of 30 days to 45 days, or even longer. This means that sellers are having a much more difficult time selling their home.

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Smarter Loans Staff

The Smarter Loans Staff is made up of writers, researchers, journalists, business leaders and industry experts who carefully research, analyze and produce Canada's highest quality content when it comes to money matters, on behalf of Smarter Loans. While we cannot possibly name every person involved in the process, we collectively credit them as Smarter Loans Writing Staff. Our work has been featured in the Toronto Star, National Post and many other publications. Today, Smarter Loans is recognized in Canada as the go-to destination for financial education, and was named the "GPS of Fintech Lending" by the Toronto Star in 2019.