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Fascinating Dynamics in Housing

January 18, 2022 | Posted in: Insights

A number of my posts during the past two years focused on soaring purchases of consumer goods resulting from healthy finances as well as the fact that Covid-19 limited access to a variety of services. One area of particular interest has been housing which experienced tremendous demand, frenzied activity, rapidly rising prices, and associated demand for pools, outdoor furniture, exercise equipment and so on. The housing market has also been a source of tremendous frustration and angst as multiple cash offers above the asking price froze out many buyers, particularly first timers.

Redfin just posted year-end housing data which includes some striking numbers and a couple of surprises. First, the median national sale price rose 15.2% in December versus the prior year and average time on the market was a mere 24 days which represents a decline of 7 days from December of 2020. The average ratio of sale to list price was 100.5% and 43% of homes actually sold above the asking price. These data are consistent with recent trends. Among the stronger markets were Austin, TX where the average sale price increased 30.3% and Greenville, SC that experienced year-over-year sales growth that led the nation at 9.4%. With regard to the cities in which Diversified Trust maintains offices, Nashville led the way with a 24.2% average price increase followed by Atlanta at 22.8%, Memphis at 20.9%, and Greensboro at 13.1%.

The really surprising statistic is that actual home sales fell 11% in December versus the prior year. Are soaring prices and painful competition finally beginning to impact demand? The answer seems to be no; the problem is inadequate supply. Listings fell 13.4% year-over-year and the current supply of homes on the market represents only one month’s sales which compares with 1.3 months one year ago.

A variety of factors account for the lack of supply. In the short term, there are well-documented shortages of both materials and labor due to the impact of Covid-19. Presumably, these problems will ease as we hopefully transition to a post-pandemic world. However, there are several more enduring issues. The first is a demographic tsunami as Millennials form new households at a very rapid pace. The U.S. Census found that 12.3 million new households were formed between 2012 and 2021 as compared to construction of only 7 million new homes. Second, a shortage of available land resulting from restrictive zoning and other factors leads to rapidly increasing prices that render the economics of construction and development difficult if not unworkable in many places. The land shortage may seem surprising given the size of our country but the problem stems from the fact that a great deal of the population migration is focused on a relatively small number of areas that are experiencing the strongest job growth.

Pundits suggest the nature of these problems is such that they will be with us for years. My crystal ball is always fuzzy, but I am hopeful that American creativity and ingenuity will find workable solutions over a shorter time horizon.