Generally, it is a seller’s market (where sellers have the upper hand in pricing and negotiations) when real estate inventory is less than a 6 month’s supply of homes. But what factors are contributing to this imbalance? What are we seeing in a few of the markets that we lend in?
SUPPLY AND DEMAND:
From the supply side, many popular real estate markets went into the COVID crisis with an inventory shortage. This shortage only increased in late March and April 2020, as wary potential sellers delisted or did not list their homes because in-person showings were largely halted. As Covid-related restrictions started lifting in late May, we saw a surge in new listings and briefly pondered whether this would cause a more balanced estate market. But, it seems that even with the surge of new listings, the market has remained a seller’s market, as demand continues to outpace supply.
Interestingly, upon speaking with peers who are potential buyers, many of them also assumed that this recession (based off of history from the Great Recession) would lead to home price drops and move the market in favor of buyers. We are not seeing this play out, at least not yet. Nationally, as of May 2020 month-end, home prices increased 3.1% year-over-year (YoY), with home prices increasing in over 75% of all of the largest US metro areas (REALTOR).
Current home buying demand is coming predominately from entry-level buyers looking for low-to-midrange priced homes (Barclays). Historically low interest rates (average of 3.26% for conventional mortgages) continue to fuel demand.
Listings of single-family homes (attached and detached) surged as stay-at-home orders were lifted, from 5,776 at the end of March 2020 to 7,312 at the end of May 2020. But this is still down from the roughly 9,100 homes that were listed at the end of May 2019. With the market continuing to favor sellers, the median home price in Denver was also up 2.13% in May YoY. Of note, though, is that the market for luxury homes (homes priced above $1MM) is now considered to be a buyer’s market, due to decreased demand in this pricing tier, as inventory levels are currently sitting around 25 months (DMAR).
In Phoenix, the market very much remains a seller’s market. Home prices were up 11.1% in April 2020, compared to the prior year (Norada). Phoenix is currently reporting an 8-year low in housing inventory. Furthermore, demand has held steady as both investors and traditional home-buyers flock to the booming city to capture relatively affordable homes (especially compared to bordering California).
Kansas City has been a notable sweetheart of real estate investors, due to the low average home prices and buoyant demand by eager buyers looking to join KC’s vibrant culture and pleasant quality of life. In fact, as of May 2020, the supply of housing inventory was only at 1.6 months, making this very much a seller’s market (KCRAR). Furthermore, inventory levels as of May 2020 were down 37.7% from the prior year (KCRAR).
Oregon is the state with the largest housing shortage in the nation (RMLS). The number of homes for sale in the Portland area has been dropping since January 2019. In April 2020, there was a 2.4 month supply of homes for sale, which was an increase from March 2020’s 1.8 month supply. As a result, the average sales price increased 4.3% to $465,200 in the first four months of 2020 compared to $445,900 during the same period last year.
Buying opportunities may arise for real estate investors as inventory may increase from the after-effects of the unemployment levels resulting from the pandemic. But it continues to be important to study and understand sales comparables and days on market in your specific buying areas. Also, as more workers are still working from home and many desire to continue doing so, pay attention to any changes in potential homebuyer’s wants and needs. For example, while the open floor plan concept has been going strong for over a decade, homeowners are now commenting that they want distinct spaces, particularly offices, for privacy and away from cooking smells from the kitchen. We are assuming buyers are going to continue to place increased emphasis on their future home’s living space and amenities (nice backyard, an office, a gym, etc.).
Please stay safe & be well,
The Merchants Mortgage Team