Seller's Market
What Is a Seller's Market?
A seller's market is a market condition characterized by a shortage of goods available for sale, resulting in pricing power for the seller. A seller's market is a term commonly applied to the property market when low supply meets high demand.
KEY TAKEAWAYS
A seller's market is a marketplace in which there are fewer goods for sale than there are interested buyers, giving the seller the ability to dictate prices.
The term is often applied to the real estate market to refer to periods of time when the interest in buying housing outstrips the available supply, resulting in higher prices in a particular region.
A seller's market is the opposite of a buyer's market, in which excess inventory versus interested potential buyers means the buyers have the power in terms of setting terms and prices.
The same concept can apply to mergers and acquisitions in the corporate world, in which increased demand for an asset that is in limited supply empowers the seller to set the pricing.
Understanding a Seller's Market
A seller's market comes into formation when demand exceeds supply for a product or service. A "seller's market" is often heard in real estate to describe a shortage of properties in the face of healthy demand. The seller of a house in a town with a good school system and limited inventory would have firm control over setting the house price. Their house could invite multiple bids and it would not be unusual for bids to exceed the seller's asking price. A buyer's market is the opposite situation, where supply exceeds the demand and therefore the power resides with the buyer in terms of setting a price.
Seller's Market Example
In 2020 and early 2021, amid the ongoing fallout from the COVID-19 pandemic, the market for housing has surged, with sellers seeing their asking prices easily met and sometimes surpassed.1 The spike relates to a diminished supply and an increased demand, particularly as potential homeowners take advantage of record-low mortgage rates. Rates on the 30-year fixed-rate mortgage hit a record low of 2.65% in January 2021.2
The slump in mortgage rates is in response to actions by the Federal Reserve. The Fed has cut key interest rates to historic lows in an attempt to support the economy, amid the pandemic. The central bank lowered the Fed funds rate, a key overnight bank lending rate, to a range of 0.00%-0.25% on March 15, 2020, and has kept it at those levels in the year since.3
The Fed funds rate impacts the prime rate, the rate banks typically charge high-end customers. The prime rate impacts many other consumer rates, including adjustable-rate mortgages.
As a result, despite 2020 having been very difficult for many people, the housing market has soared. However, the current seller's market has been showing signs of fatigue with sales of existing homes falling 6.6% in February after rising for the previous two months, according to the latest statistics from the National Association of Realtors. However, the February figure still marks a year-over-year gain of 9.1%.1
Seller's Market in M&A
Certain conditions create a seller's market in the corporate landscape. Again, excess demand for an asset that is limited in supply will shift the balance of power to the seller's side in pricing. Demand is stimulated and bolstered by a positive economic environment, low or modest interest rates, high cash balances, and strong earnings, and other reasons.
When executives of a company are confident about its future prospects, they are more willing to pay larger premiums for assets that have scarcity value. These target companies may have superior brand equity, an innovative or leading technology, a dominant market share in a product area or geography, or an efficient distribution network that is difficult to replicate. Whatever the reason for its relative scarcity, the company, if it decides to put itself up for sale, would likely receive a bid or multiple bids (price war) that the Board of Directors and shareholders would find attractive.