We all knew it. The time would eventually come when the imaginary housing market reset button was pressed and the market itself rebalanced. It was bound to happen and we are now living through it. 2023 will be a clean up year. Supply, demand, buyers, sellers, mortgage rates, builders and more will strive to balance themselves in a way that is sustainable in our growing economy.
Certain price points and communities have more supply than demand right now.
2023 will bring the clean up of new construction spec homes. A spec(ulative) home is one built on the idea it will easily sell for a profit. This might not be the case this year. Fundamentally, there are more new construction spec homes on the market than needed. One would anticipate builders slowing the start of new construction in 2023 while they wait for the market to absorb the excess and bring balance back into place.
Current ACTIVE inventory is 1,457 single family homes or 1.9 months supply (which has increased from 1,015 a year ago). ACTIVE new construction homes are at a 6.2 months supply which is the equivalent of 1,018 homes. Overall, active inventory in the Des Moines metro area remains relatively low, especially with existing homes. With the idea that the market is going to clean itself up, it can be expected that existing inventory will stay low due to homeowners having fixed/low interest rates.
The market is bracing for a weaker Q1 than we are accustomed to. Total single family homes PENDING was down by 626 homes when compared to Q1 of 2022. Total new construction pending homes were down by 388 homes versus that of a year ago. Again, the reset button has been pressed and we are adjusting.
We must remind ourselves that the market has been HOT for so long that we may find ourselves looking at current numbers with a false sense of discouragement. If you look back farther in our history (from 2014-2020), the average total pending at this time of year was 1,174 for the metro area with the average number of new construction pending homes at 296. Surprising to note, our Q1 of 2023 total pending homes number is just under the historical average and the number of new construction pending homes is actually about 25% higher than a standard year in Des Moines. This is a great signal to see.
In 2022, the total number of single family homes closed was 9,379. Of which, 2,099 ( 22%) were new construction homes. This was 1,774 less homes sold on MLS than the previous year with the largest slip happening in Q4. The average sale price of a single family new home in 2022 was $433,000 (four hundred and thirty three thousand) — a 16% INCREASE year over year!
Interestingly enough, the average new construction LIST price is currently at $463,000. One must point out that the average new house price in 2022 is almost $100,000 higher than the price was just two years prior. We call this “COVID” equity, the equity that all homeowners got because of free money, cheap interest rates and inflationary factors during the pandemic. As the federal government attempts to slow inflation in the form of higher interest rates, we all wonder how much of that equity, if any, will diminish.
There is good news and bad news when we look at all 19 communities in the Des Moines metro area. Overall, 2022 was right in line with Des Moines’ average yearly new construction permits issued at just over 2,400 permits, which is very good. At the same time, we saw a major drop in building permits from 2021 to 2022 which is not so great.
With about 1,000 less permits pulled year over year, it shows builders reacted quickly to higher interest rates and pulled back starts. However, the number of new lots developed tells a different story. Looking back to 2018, 2019, and 2020 – there were about 2,800 lots developed annually. In 2021, that increased to 3,194 lots developed and to 3,502 in 2022.
As the market pushes to reset, it is going to take a little time to work through the lot inventories that have accumulated in certain communities. It is here that developers got ambitious and pushed ahead, despite the market uncertainty. That being said, developers have now slowed down their pace and it is likely that we will see less residential lots being developed in 2023.
Affordability these days is an unsolved math equation. High interest rates + high prices of homes are not equaling the velocity of sales that we would like to see. What changes will this market reset bring? Will housing prices come down? Will interest rates come down? Or will it be a little of both? We must also remember that another part of the equation is wage growth. How will that play out in this affordability equation? If there were to be strong enough wage growth and low unemployment, could that be enough to keep prices stable?
What it comes down to is that you can kill demand but a shortage is still going to exist. The market will naturally continue to push to equalize inventory levels. We will likely see the shortage of existing homes on the market slowly shrink away. One can expect that new construction homes dominate total active listings. We will continue to have faith in that imaginary reset button and hope that inventory levels will feel more balanced by fall 2023. Assuming interest rates come down some, it is safe to say, we can prepare for a strong 2024.
Thank you to everyone who attended the Builder and Developer Luncheon!