Pending Home Sales Report February 2021
A Pending Home Sales Report is a leading indicator of home sales, meaning it gives you earlier insight into housing market activity than you could gain by studying lagging indicators, such as home sales.
The word "pending" is short for "contract pending," thus the Pending Home Sales Report measures contract activity in the market. Outside of detailed supply and demand numbers, there is no better source of current information than one can gather through a thorough examination of new contract activity in the real estate market.
Today's report is a comprehensive review of new contracts and it concludes with a revealing forecast of the coming months in the Tallahassee real estate market.
Prior to our charts and graphs today, take a look at the homes for sale in Tallahassee and notice how the majority of them are already "contract pending" (once you get down below the luxury homes).
Homes For Sale In Tallahassee
VIDEO: Pending Home Sales Report
Hot Housing Market Continues
Today's report was assembled from data in the Tallahassee MLS on February 17, 2021. On that date, I retrieved all sales that were closed from January 2019 through the middle of February 2021 and sorted them by contract date (not closing date). Additionally, I added all properties that are under contract and sorted the entire group by the date contracts were written.
What this data represents is all contracts written that are either still working towards closing or ones that have closed escrow (thus the agreements were confirmed).
What this data omits is all contracts that were written and subsequently failed to close. Each month when I assemble a Pending Home Sales Report, failed contracts are removed so that we are only left with ones waiting to close or those that successfully closed.
Because of this, there is a high likelihood that the most-recent months account for contracts that WILL NOT close, while most distant months will have very few open contracts remaining as all have either closed or have failed to close by now.
In other words, the past will remain pretty much the same, while the present will adjust as time moves forward.
Our first graph plots each month's sales.
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.
Currently, the number of contracts written through the middle of February has grown to just 5% fewer than those written through all of February last year, and we still have the final two weeks of February to go!
Remember, a healthy percentage of these new contracts will not close, so it will take some time to get an accurate evaluation of the market today versus the market at this time last year.
Homebuilders Need To Increase Production
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.
While we did see builders increase production in 2020, it appears as if they are cooling off again. I do not understand why.
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 was new construction while the red line shows the one-year trend of the new construction share of the market.
Last year, 12% of the contracts written were for new homes, but the trend for new home share has been dropping for the past four months. As of right now, 59 new construction homes have gone under contract in 2021 versus the 75 that were written through all of February in 2020, a 21% shortfall though we still have a few weeks left to close the gap in 2021.
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 double 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 a plea to all local homebuilders, we need more houses!
Home Prices Move Higher
Using the same data, I calculated the average price of homes under contract in 2021 each month and compared it with the same months in 2020.
On average in 2021, buyers have been spending 4% more than they were in 2020.
We have to remember that this is an interest-rate-fueled buying frenzy, and it will slow considerably when interest rates rise. The high-end could go nearly dormant if interest rates rise substantially, and that would slow the average home price growth considerably.
One thing to note though is that the MLS does not reveal the contract price for pending home sales. That means for homes that have closed, we're using the actual sales price, but for those still under contract, we are using the asking price.
This means that when all the homes tracked in this report close, it's likely we'll see the difference between the two years tighten up a little (as the majority of closed prices will likely be at or lower than the corresponding asking prices).
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Soaring Real Estate Appreciation
This next graph tracks the average home value in 2021 each month and compares it with the same months in 2020.
The graph shows that the appreciation rate each month in early 2021 is averaging just under 9%.
Overall, last year's appreciation rate was close to 9.5%, which is about three times the average we've seen over the past thirty years. With inventory remaining at historic lows, I'm expecting to see appreciation move even higher.
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.
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.
Pipeline Shows Strong Buyer Activity
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 42% of contracts are older than 45 days, which is more than double what we measured the last time we published a Pending Home Sales Report. This is a sign that there are likely going to be a lot of canceled contracts within the next 30 days.
Right now, the oldest pending home sale goes back to August of 2018, which is likely an MLS maintenance issue that needs to be removed. There are an additional 8 pending contracts that are more than a year old that are likely bogus as well.
Currently, there are 638 Tallahassee homes for sale in the MLS that are under contract with buyers (pending contracts). This represents a growth of nearly 28% since our last Pending Home Sales Report.
This is an abnormal, non-seasonal level of activity during what is normally a time of the year that generates almost the fewest contracts of the year. If we were to add the contracts from December as well, then I would call this very high activity for what is normally the very slowest time of the year.
Based upon the data, combined with what I'm seeing in the field, the only thing that will stop 2021 from posting a record year is the limited supply of homes for sale. The buyers are poised to strike, but we need more homes.
It's important to understand what this means. Yes, demand has grown about 28% from last month, at a time of year where we don't expect much if any growth at all. Demand is amazingly strong and the limited inventory of homes for sale means that relative demand (demand relative to the current supply of homes) has only grown.
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 January Compared To Last January
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 in the pending home sales report as a bridge to our other market reports and videos that focus on closed sales dates.
Five of the past five months have posted gains over the same months in the year prior. In January, the market was up 15% over last January, and that was a strong January as well.
So how strong was January? The graph above shows that it was the third-best January 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.
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.
Any student of 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.
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