Pending Home Sale Report May 2021
The May Pending Home Sales Report is here, and it holds the answers to what is going on today in the Tallahassee real estate market. As a leading indicator of home sales, the Pending Home Sales Report provides an early insight into housing market activity.
When you couple what you can learn by studying new contracts with a review of detailed supply and demand numbers, you end up with the best understanding of current activity in the housing market.
Today's report is a comprehensive review of new contracts and it concludes with an accurate forecast of the coming months in the Tallahassee real estate market.
First, check out the homes for sale in Tallahassee and notice how many of them are already "contract pending" (especially after you scroll past the luxury homes).
Homes For Sale In Tallahassee
Pending Home Sales Report
New Contracts In The Real Estate Market
This graph plots the number of home sales each month, organized by the date the contracts were written. This is important to note, as most graphs that I publish are based upon sales closing dates, not contract dates. As these contracts await closing, you must understand that some will fall out, thus recent months will adjust as we move forward whereas further past months are pretty much set for good.
The number of homes that were put under contract each month are color-coded, with the blue bars showing 2019, the gray bars showing 2020, and the red bars showing 2021 contracts.
Contracts have been higher all year, with April contracts soaring to the highest level we've seen in more than 14 years. The number of contracts written through the 18th of May is already 26% more than those written through all of May of last year, and we still have the final week of May to go!
Again, not all of these new contracts will close, so it will take some time to get an accurate evaluation of the market today versus the market at this time in previous years, but I think it is clear that activity in 2021 is far past that of the recent two years.
Rising Demand For Houses
Through all of our inventory reports over the past few years, I have pointed out that we need more homes. We need existing sellers to put their homes on the market, but more importantly, we need builders to deliver additional homes to compensate for the lack of new construction over the past 6 years.
Builder production has dropped significantly in the first five months of 2021, and May is poised to post the worst month in the past several years.
The blue bars measure existing home contracts, both pending and closed, by the date the contracts were written while the red measures the same for new home construction.
The red triangles report the percentage of contracts written each month that were new construction, and right now May is reporting about 5% new. We need to see new construction push closer to 20% or more for at least a year or two, so the 5% number is just not getting it done.
Last year, just over 12% of the contracts written were for new homes, but the trend for new homes this year has dropped to about 10%. As of right now, 211 new construction homes have gone under contract in 2021 versus the 209 that were written through all of May in 2020, but we still have just over a week left in May.
So the number of new homes put under contract this year is about the same as last year, but the existing homes have been flying off the shelf (at soaring prices). Builders missed a huge opportunity to sell a lot of homes and to help keep prices in check.
In the 1990s, it was not uncommon for 20% of all home sales to be new construction, and back then we did not have an inventory shortage like we do today. Builders today could quadruple production without the risk of creating an oversupply in the market, so long as they pay attention to the areas and price ranges in which they build.
Consider this my continuing plea to all local homebuilders, we need more houses! If you want to know why that I believe builders are not building today, you should check my recent video on the US housing market below.
New Home Construction Report
Have Home Prices Stopped Moving Higher?
In this next graph, I calculated the average price of homes under contract in 2021 each month and compared it with the same months in 2020. Look what's happening in May!
Buyers in May have been spending nearly the exact amount that May buyers were spending in 2020.
This is a huge difference from what we saw in the four months earlier this year. In fact, the average home contract price in April was up a whopping 13%, and the first four months averaged more than 9% higher than last year, so a zero really stands out.
Supply and demand determine price movement, and the lack of inventory means that we should expect prices to continue higher, but for some reason, that has not been the case this month. Before we start jumping to conclusions, let's take a look at the average contract value each month.
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Real Estate Appreciation
Similar to the previous graph which tracked home prices, this graph tracks the average home value in 2021 each month and compares it with the same months in 2020. Prices are what buyers are spending, whereas values are what sellers are getting and is used to measure appreciation in the housing market.
The graph shows that the appreciation rate for the first four months in 2021 averaged 10%, but that average has slowed to just below 5% in May. Overall through the preparation of this report, the average appreciation rate is roughly 9%.
So prices in May have not moved, but values have gone higher. This simply means that smaller homes are selling in May (when compared to May of last year). For our viewers who were not paying attention to the housing market in May of 2020, it was heavily influenced by COVID and far fewer homes sold than in the prior year.
We will have to keep a close eye on this development, as it could suggest that the high end of the housing market is cooling off. This would bring down the average sales price, yet still allow for appreciation across the lower 90% of the market.
As reported in numerous other market updates, we continue to see low inventory levels in most areas and price ranges below $600K, and this is the biggest contributor to the accelerated appreciation rate. Despite the decline in May, the appreciation rate is still roughly three times the historic norm, and low inventories levels could make this worse.
Now is a great time to sell a home, as buyers want to take advantage of historic low mortgage interest rates before they go away.
Just How Active Are Homebuyers?
This graph identifies when the current pending and closed contracts were written, with closed contracts shown in blue and pending contracts shown in red. We do this to identify the highest buyer-activity periods and to evaluate the health of the pipeline.
By pipeline, I mean the pending home sales and how they are distributed. Since the typical contract closes in 30 to 45 days, we have to be concerned with the number of contracts that appear in our report that are older than 45 days. Currently, about 33% of contracts are older than 45 days, which is better than what we measured the last time we published a Pending Home Sales Report. Currently, less than 6% of pending contracts in our MLS were written before this year.
Right now, the oldest pending home sale goes back to September of 2017, which is likely an MLS maintenance issue that needs to be removed. There are an additional 6 pending contracts that are more than a year old and are likely bogus as well.
Currently, there are 836 Tallahassee homes for sale in the MLS that are under contract with buyers (pending contracts). This represents a growth of nearly 17% since our last Pending Home Sales Report.
This is a normal seasonal move from what we historically see as the market has moved into the strong summer months. What is not normal is the percentage of homes listed that are already under contract with buyers. Specifically, the number of contracts compared to the overall pool of listings is far higher than we would seasonably experience, so sales are good but inventories are far too low.
It's important to understand what this means. Yes, demand has grown about 17% from last month, at a time of year where we expect to see demand grow. The limited inventory of homes for sale means that relative demand (demand relative to the current supply of homes) is exploding.
Now, let me repeat something I have been saying for more than six months, and it continues to be true. Buyers are wanting to take advantage of low mortgage interest rates, so now is the best time to sell a home that I have seen in my 30 years selling homes in Tallahassee.
How April Compared To Last April
The year-over-year home sales graph below has been set up in a different fashion than all previous graphs in this report.
Note that this one shows all homes sold segmented by the date of closing, while the past graphs were assembled based upon contract dates. I include this and the following graph in the pending home sales report as a bridge to our other market reports and videos where closed sales dates are used to create the graphs.
Nine of the past ten months have posted gains over the same months in the year prior, including all of the past eight months. In April, the market was up 22% over last April, but much of this has to do with the fact that COVID was negatively impacting sales a year ago. It's too early to call May, but I suspect we'll have our nineth straight months of gains.
So how strong were the first four months of 2021? The graph above shows that it was the third-best start of the year on record, falling behind only 2005 and 2006 when inorganic demand pushed the market to unsustainable highs.
So should we be worried about the sustainability of the current market?
In short, yes and no. Yes, we need to be concerned about how the market will cool when mortgage interest rates rise, but no, the number of sales occurring right now is very much an acceptable level when you consider the population growth in Tallahassee since the market peaked 15 years ago. This pretty much mirrors the US housing market (you can view a comprehensive examination of the state of the US housing market on our Youtube Channel).
As an over-simplification, we are bigger now so we should expect more buyers in the market. Additionally, we are not seeing the signs of a housing bubble like we did in 2005, where inventory levels started to rise. Today, inventory levels are falling, a sign that more homes are needed.
Homeowners who have been considering a move need to take note. Current conditions are the best I've ever seen for getting top dollar for your home while also selling it within a predictable time schedule.
I am confident that the seller's market conditions will continue for the foreseeable future, but I do believe rising mortgage interest rates will eventually reduce the advantage that current home sellers enjoy.
Anybody who studies interest rate history will tell you that mortgage interest rates are going to rise. Nobody knows when, but certainly, rates will not stay this low forever. When mortgage interest rates do rise, demand at the top of the market will erode significantly and decline throughout the lower price ranges.
If you know you want to move, you should strongly consider doing so immediately while both inventories and mortgage interest rates are each working to your advantage.
Regardless of what you decide, we'll be here to keep you up to date on the pending home sales in the Tallahassee real estate market.