Dynamics of real estate market recovery and buyer behaviour

The real estate market operates in cycles, with periods of rising prices, stagnation, decline and eventual recovery.

One of the pivotal moments in this cycle is when prices hit their lowest point, or "bottom out." At that stage, buyers begin to re-enter the market. This dynamic shift sets the stage for renewed activity and eventual market stabilization.

But what exactly happens when real estate prices bottom out, and how does buyer behaviour shape the recovery?

In my last column, I talked about how offers are affected in a slow or falling market. This time, I thought I would look at what happens when things finally hit bottom. Every situation is different and this is by no means a perfect explanation.

When real estate prices bottom out, it signals the end of a decline and the beginning of stabilization. At this point, prices are at their lowest, often reflecting a combination of different factors—things like market oversupply, economic challenges and seller adjustments, where gradually reducing asking prices begin to better align with buyer expectations and their ability to get financing.

Bottoming out doesn’t happen overnight, it’s typically preceded by a period of slower declines as the market reaches an equilibrium where buyers and sellers are willing to engage.

Care needs to be taken in a falling market. When I did stock trading, there was two sayings, “It’s dangerous to try and catch a falling knife” and “It might be a dead cat bounce.” They mean that when things are coming down you don’t know if it has really hit bottom and when things rebound a bit that doesn’t necessarily mean prices have stopped falling.

Real-estate prices aren’t usually as volatile as stocks but care still needs to be taken. When prices do stabilize, buyers begin to view the market as ripe for opportunity. Several key dynamics unfold:

Sidelined buyers feel more confident about entering the market. The fear of further price drops diminishes as stabilization signals that the worst may be over. These buyers are often:

• First-time buyers: Attracted by affordable entry points, they see a chance to purchase homes that were previously out of reach.

• Investors: With prices at their lowest, investors look to acquire properties with the potential for future appreciation.

• Move-up buyers: Homeowners looking to upgrade find that they can get more value for their money during this phase. That is often tricky because moving up often means moving out, and selling at the bottom may mean less realized equity, meaning less money to spend on an upgrade.

Competitive pricing encourages transactions

As sellers accept the new market reality and adjust prices accordingly, buyers perceive value in the properties available. Homes priced competitively tend to sell faster, further signalling market recovery. Sellers who remain inflexible on pricing may still struggle to attract offers, but overall, transaction volumes increase.

Once buyers start purchasing, the surplus inventory begins to dwindle. That shift from oversupply to balanced, or even tight, inventory can happen quickly, especially if new construction has slowed during the downturn. Buyers who were initially hesitant, may now feel a sense of urgency, fearing they’ll miss out on desirable properties.

During a decline, lowball offers were common as buyers tested seller flexibility. When prices bottom out, however, the market dynamic changes. With increased competition and shrinking inventory, buyers are more likely to make reasonable offers to secure the property they want. Multiple-offer situations often arise for particularly desirable homes.

Buyer psychology plays a crucial role in shaping market recovery. During a decline, fear drives many buyers to wait, concerned purchasing too soon could result in overpaying. When the market bottoms out, this fear shifts to FOMO (fear of missing out) as buyers realize they could lose opportunities to others. This shift in mindset often accelerates the recovery process.

Indicators that attract buyers

Several market indicators help reassure buyers that the time is right to act:

• Stabilizing prices: Flat or marginally increasing prices suggest the decline has ended.

• Interest rate adjustments: A pause or drop in mortgage rates can motivate buyers to lock in favourable terms.

• Increased sales activity: A rise in transactions shows people are buying. The numbers start to reflect this a few weeks after those accepted offers have subjects removed and are then reported as sold.

While a bottomed-out market offers opportunities, it’s not without challenges such as buyer competition, price uncertainty and limited inventory.

For sellers, this period is equally critical. Listing at the right price is essential to attract offers while avoiding the risk of underselling in a recovering market.

Strategies

For buyers: Act decisively, secure financing early and stay informed.

For sellers: Price strategically, highlight value and be flexible.

The road to recovery

When real estate prices bottom out, it marks a turning point in the market cycle.

Are we there yet? I’m not sure but the interest rate drop didn’t hurt and it feels like things are shifting. Just be careful and listen for the meow.

If you have suggestions for other real estate-related articles, please email me at [email protected]

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.