Disturbing News In The Real Estate Supply Pipeline
It's time to provide an update on the supply of homes for sale in Tallahassee, and I can tell you, it is disturbing.
Today's report uses data from the Tallahassee real estate market, but I continue reading and hearing from agents around the country about their markets and our report could easily apply to those areas too. From coast to coast, real estate agents are reporting historic-low inventories.
Follow along as I dissect the supply-side of the housing market, examining what’s coming in, what's under contract, and what present levels mean for home values in 2022 and buying a home today.
I've included a list of the current active listings in Tallahassee, sorted by price from high to low. As you scroll down from the highest-priced homes, take note of just how many properties are already under contract with buyers!
Active Listings In Tallahassee
Where's The Supply In The Housing Market?
This graph displays the current homes for sale, separated by whether or not they are under contract with buyers.
Homes for sale that are already under contract with buyers are shown in blue, while those for sale not yet under contract with buyers are shown in red. The ratio of homes under contract to all homes listed for sale is shown as a solid green line and measured on the right vertical axis. The green-dashed line reports the one-year trend of this under-contract percentage.
Right now, there are only 291 homes for sale in Tallahassee that are not yet under contract with buyers. This is the least that we've recorded ever. To provide some context for these numbers, Leon County averaged 430 homes sold and closed each month in 2021, so the actual available inventory is only enough for about three weeks worth of buyers (meaning it's less than one month's supply of homes that are available!).
The percentage of homes under contract in January is 61%, far higher than the 47% of homes under contract in January of last year. When we take in the big picture of the graph, it is clear how things are so different today than they were ten years ago. It shows how the market has gone from a strong buyers' market to a strong sellers' market.
From left to right, look at how the percentage of homes under contract has reversed. On the left side of the graph, the height of the red bars was about four times the height of the blues, meaning there were far more homes for sale NOT under contract than there were homes under contract with buyers.
Right now, 61% of all current listings on the market are already under contract with buyers, meaning that today, three out of every five active listings have contracts today versus less than one-half just one year ago.
Buyers must understand that when they go online and look at homes for sale, most of the homes they see are not really available, as other buyers have them secured with contracts. I can't tell you how many times a buyer calls us to go see a home they found on Realtor.com or Zillow and we have to tell them it has already been put under contract. This is why we recommend you use the manausa.com property search tool, it updates every 15 minutes and is the best source of current listing statuses on homes for sale in Tallahassee.
As I have been saying for years, the supply of homes for sale is far too low for buyers to be able to casually shop for a home. The situation now makes me gravely concerned for buyers who enter the market later this year. If the trend continues, we could very well get to a point that less than 25% of the inventory could truly be available. This would make our already too-high appreciation rate soar.
Let’s take an in-depth look at the supply side of the housing market and examine exactly what's happening that is causing this low level of availability of homes for sale.
Fresh Listings Year-Over-Year
After a strong summer season, year-over-year fresh listings plummeted during the final four months of 2021.
This graph shows how each month fared (percentage-wise) compared to the same month in the prior year for fresh new listings entering the MLS.
I use the term “fresh” to describe homes listed for sale that were not previously listed. These are homes that are truly new to the market, not merely old inventory that was canceled and relisted by the agent or a new agent.
While the year-end decline is alarming, I can tell you that it was expected. COVID hit our market in early 2020, causing many would-be sellers to stay out of the market in the summer. Many came back to the market later in the year (2020).
This COVID-related seasonal shift resulted in low listings numbers in the summer of 2020 and high listing numbers towards the end of the year. Thus when we compare 2021 numbers with 2020, it's not surprising that summer months showed gains and latter months showed declines.
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Fresh Existing Listings
While the previous graph showed a month-to-month comparison of fresh new listings, this one reports fresh listings of existing homes from January through December of each year.
We see that the number of fresh (existing home) listings rose 8% in 2021, making last year the best of the recent eight years when ranking them by the number of fresh existing listings entering the market.
The housing market started the year with too few homes for sale, so even a healthy 8% rise in fresh existing home listings has done nothing to bring balance to the market. The continuing low supply of homes coupled with heightened demand has pushed prices higher and has accelerated real estate appreciation to unhealthy levels.
You might believe this is "good news" for sellers as their homes are now worth more, but you also have to remember that most sellers are going to be buying another home in the same market (with the same soaring prices and the same lack of inventory).
Of course, the existing home sales market does not stand alone. We also need to examine what the home builders have been doing.
Fresh New Construction Listings
Similar to the previous graph that showed fresh listings for the existing homes market, this graph shows freshly listed new construction homes and is the most disappointing information I am sharing in this report.
The number of listings for new construction homes entering the market in 2021 fell 36% when compared to 2020. The 478 new construction listings represent just under two-thirds of the 745 new construction listings created in 2020. Even as the demand in the market continued higher, new construction activity fell. This low production level represents the heart of our problem. Tallahassee needs local builders to produce more homes, so both City and County officials need to start working towards supporting them.
With home builders producing homes at a slower rate, rapid appreciation has taken over the housing market. Last year's appreciation of 11.3% was more than triple what we would expect in an average year, and this year's rate is likely to be higher. Unless we see mortgage interest rates rise significantly to cool demand, home value growth could very well surpass 20% this year.
New Versus Used Home Sales
This graph plots new home construction sales versus existing home sales annually from January 1991 through November 2021. The number of existing homes sold is shown in blue, while the number of new homes sold is shown in red. The gray line plots the new construction percentage share, while the dashed gray line plots its ten-year average.
Back in the 1990s, builders were bringing more than 1,100 new homes per year to the market. In the next decade, the average was over 1,300 homes. The last decade saw that average decline to 434 homes per year.
Initially, the decline in new construction was needed, as the market was grossly over-supplied and required time to consume all the extra homes. That correction was completed in 2016, so we needed "normal" building operations to commence.
With today's relative supply of homes for sale sitting under three months of supply, our inventory could easily be doubled, so builders today can comfortably permit another 1,500 homes on top of what is already permitted. You have to remember, while demand is high, it has been stifled by a lack of inventory, so having more homes in the past would have resulted in more sales.
Slow production means that builders missed an opportunity to sell an additional several thousand homes over the past five years. The void that these missing new construction homes did not fill has created a lopsided market with home values rising out of control.
Now that we've covered existing and new construction homes separately, let's examine the global view of the supply side of our market, where we combine new homes with used homes which produces the following graph detailing the total number of fresh new listings that have entered the market through 2021.
Fresh Listings Of Homes For Sale
This graph reveals that the combination of new construction homes and existing homes have 2021 ranked #1 of the past 8 years for new inventory entering the housing market.
Unfortunately, when you consider that the number of homes sold rose 16% last year, a 1.8% rise in fresh inventory means that inventory declined even further. The increase came largely from people who sold a home and bought a home in the same market (meaning no real impact on the supply). Today's sky-high demand has created optimal market conditions for sellers, so there is no reason for incoming listings to be so low. So what doe this mean?
It means tough sledding for buyers. Buyers right now are hyperactive due to a fear of missing out on low mortgage interest rates, but we find the inventory far too low to satisfy this demand. So, let's make this simple. Supply is low, demand is high, so home prices are going through the roof.
Stale Inventory Is All But Gone
Another set of listings we track is those that have recently been listed for sale, left the market without selling, and then returned with a new real estate broker. These are the "stale" listings.
The graph above shows the stale listings coming back into the market each year from January through December. With inventory low and home sellers' success rate near 90%, this list continues to get smaller.
Stale listings have always been a source of inventory that we could rely upon. Sellers who in the past did not market their homes aggressively, but then had a change of motivation, are now legitimate listings that will sell in the current year. But we can no longer rely on this being a large source of potential inventory.
The 375 stale listings that entered the market in 2021 measure 57% fewer than the 867 stale listings that entered the market in 2015, and 19% fewer than what we reported last year. The number of listings that go stale will never go away, but today's count is fewer than any year going back to the market crash of 2006.
Relative Supply Of Homes
This table measures the supply of homes for sale, relative to the current rate of demand. The resulting number for each area and price range is measured in "months of supply," and the number that reveals a balanced market is a measure of 6.0.
Historically, a market with six months of supply has produced steady home sales and an appreciation rate of just over 3%. When the relative supply drops below 6 months of supply, we call this a seller's market as there are more buyers than sellers. When the numbers rise above 6, we refer to that as a buyer's market, as there are more sellers than buyers. Red shaded areas reveal a seller's market condition. Orange areas remain in a buyers' market, while the few white-shaded areas are fairly balanced.
The table segments the market through home price categories in $50,000 increments up to $1M.
These results clearly show that the supply of homes for sale, relative to the current hot rate of demand, has established a new record low. With just a slight rise in fresh new listings combined with the growth of the buyer pool, the months of supply of homes for sale is woefully low. This table shows you why such a high percentage of our current listings are already under contract with buyers.
Right now, the overall market below $800K is facing strong sellers' market conditions. There are areas and price ranges on the west side of town down to about $300,000 that remain in a buyers' market, and overall across Leon County, homes priced above $950,000 remain in a glutted buyers' market.
The very bottom line of the table shows you last month's annualized relative supply, and an interesting shift has occurred. We see no change on the east side of town, but the west side of town has seen the relative supply decline. I suspect this means that buyers are moving westward as they no longer can find what they need (or can afford) on the east side of town.
We'll keep a close eye on this to see if a trend is forming, but for now, pay close attention to the area and price ranges for the homes you plan to sell and buy. Overall, know that market is crazy hot right now, so you have to have a good plan.
Remember, there remains a large pool of buyers who missed out on getting homes last year, and they are better educated and highly motivated not to miss out this year when a home becomes available.
We need builders to step up and produce inventory in the areas and price ranges shaded in red if they are capable. Obviously, we're not going to see a builder bring in new units under $200K in NE Tallahassee, but there are a lot of red-shaded areas in our table that should be pursued.
If I were a builder and wanted to ensure that I did not build homes that the market does not need, I would look at the red-shaded areas with a value below 5 months of supply. The market is demanding these homes, why not build and sell them?
If you are a local home builder who would like analytical guidance on where and what to build, I’m happy to help, just give me a call.
For non-builders, you should know that this is the hottest seller's market ever, so if you've been thinking about moving, it's time to act.
Right now, mortgage interest rates have surged higher and are above 3.5%, but buyers need to understand that this still represents cheap money. Nobody can say for sure if we'll see rates dip back down, but most of us are very confident that the trend will be higher for the foreseeable future.
Rising mortgage interest rates will not likely reduce the value of homes any time soon, but the rising cost of borrowing money will increase monthly payments and begin to push buyers down the affordability chain.
If you plan on buying a home after you sell your current one, take advantage of relatively low mortgage interest rates, or just take advantage of the strong demand that these low rates have created.
One day in the future, you will look back at 2022 as perhaps the last chance ever to get a house at these low prices and be financed with a mortgage interest rate below 4%. In the future, not only will home prices be higher, but so too will be the rate you pay when you borrow money for the home. Don't let this opportunity slip away!
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