During The Builder and Developer Luncheon on February 24, 2022, I compared the building/housing industry to a Nascar race. With the hot market…we are all speeding down the track at high speeds. Everything is going smoothly. Maybe too smooth.
This is exactly how I feel the real estate industry is going right now. The housing market is setting records every way we look at it! Inventory is extremely low, with bidding wars to top it off! As a real estate agent, one cannot work enough hours to keep up with the demand. Everything is moving so very fast (especially price increases), that one cannot help but wonder; how long can it last? When does a tire pop and a multi-car crash happen? Eventually the home prices will have to meet the rising interest rates. Should you pump your brakes or keep your foot on the gas?
Currently, the active single family home inventory is 1,015 homes; a number that is very similar to last year at this time. The shocking fact is that, out of those active homes, 726 are new construction. That is 71%! Overall, there are only 289 resale homes on the MLS equating to a 1.1 months’ supply of total inventory. New construction holds a 3.7 months’ supply.
The fact that 71% of today’s active single family homes are new builds is not typical. Looking back, from 2014-2020, only 37% of the active inventory homes were new builds. That is a tremendous difference! At an even closer look, comparing February 2021 to February 2022, the percentage of new construction inventory increased 10% from 61%. Only time will tell us if inventory will go back to previous averages or remain a trend for years to come.
New construction prices of single family homes increased by 9% year over year for 2021. When compared to 2022, there was a 14% increase year over year, making this month’s average selling price $432,000! The dramatic increase in the prices of building materials made this jump expected and predictable. The blessing to our industry has been the low interest rates, paired with strong demand. This has allowed buyers to afford homes even with the exalted building costs.
Change is coming, it is just a matter of when. Interest rates are beginning to rise, in an attempt to slow inflation, making affordability more of a problem for potential buyers. This is going to be at the forefront of the minds for the foreseeable future. A time will come when construction costs and interest rates reach a threshold that slows consumer demand.
Other factors that will lead to the slowing of consumer demand include the increase in wage growth, rises commodity prices and the recovering of supply chain issues. The idea that homeowners will be sitting with record high home equity is also something to be considered. Market inventory will be extremely low, fluctuating with the new buying trends inspired by the pandemic.
When speculating on the future, it is important to remember the past. Take the average scenario from 2021, for example. In 2021, average new construction of a single family home sale price was $372,000 with average interest rates of 2.65% so P&I was $1,500 (based on a 30 year conventional loan with 5% down). Today, average sale price is $432,000 with average interest rates of 4.25%.This makes the estimated P&I to be $2,125. The difference in monthly payments being $625, or a 42% increase!
In conclusion, the pending single family homes at the end of Q1 were 1,735, compared to 1,898 homes in 2021 and 1,197 in 2020. Pending market is strong but at total of 150 homes from last year. Of those currently pending, 43% are new construction. Homes sold in Q1 registered at recording breaking numbers, yet again. 11,153 single family homes closed so far this year, of which 21% were new construction.
As we prepare for Q2, the question remains: does one put the pedal to the medal or brake for a cautionary turn ahead? What is going to happen in the housing market and how much longer can it go full speed ahead? One thing can be certain, no road is smooth forever.
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