By JAN STAPLETON 

One look at July’s Home Sales Report was enough to make some say, “aha, I told you the market was going to crash.”  

Well, it didn’t. And there are local fundamentals that weigh against the sky falling. Still, there were enough negative numbers that unpacking some of them for a closer look is warranted. 

HOME SALES PLUMMET 

When local home sales drop by double digits, it gets attention. Sales have been slowly retreating from unsustainable levels for the past 17 months in the wake of higher home prices, higher interest rates, and lack of inventory. Another factor is wages have not kept pace with home prices. 

But will sales continue declining? 

That depends.  

The outlook is for more softening through the end of the year. But there are signs of a slight demand increase. A better picture will come early next week with the Northeast Tennessee Association of Realtors (NETAR) Pending Sales Report plus the mid-month update. 

PRICES FLATTEN  

Although the sales figures were a shocker, home prices continued plodding along with small monthly and some hefty year-over-year increases. Prices have been in the $210K to $267K range for 18 months. They’re still at a record high and the dynamic to keep them in that range is strong. Aside from an unanticipated economic catastrophe, there won’t be a lot of downward pressure on prices until there’s a substantial inventory increase.  

NAR’s Chief Economist and head of research, Lawrence Yun, told a Real Estate Forecast audience this month to look for price growth.

INVENTORY 

The region’s stock of existing homes for sale has been flat for 14 months and sub-balanced market conditions since 2018. 

Many – if not most – local homeowners are sitting on mortgages with a 4 percent or less rate. So far, most have been unwilling to turn that loose for a new home. The low-rate mortgages are a powerful incentive is to keep it for an investment property or passive income source. 

One effort to nudge owners to list their homes is NAR’s lobbying for a short-term capital gains benefit. It’s still in the talking stages in Congress. 

Distressed sales – foreclosures – are nowhere near levels that could boost inventory. They’re far behind the local historic levels because of equity gains owners received during the last four years. 

The region’s new home industry is picking up steam. Building permits, an indicator of future construction, have been running slightly behind last year due to the financing squeeze imposed by higher interest rates. And some builders are shifting some of their efforts to the remodeling market where the return on investment is faster. 

But local builders – especially D.R. Horton – are stepping up site development and new home construction. There are ample “in the pipeline” projects. But many are not in the execution stage yet. Depending on supply chain, labor and financial conditions that should pick up later this year and next year. 

DEMAND 

Housing demand is fickle, and almost all the data focuses on what has already happened. The most reliable forward-looking indicator is pending sales. Since they focus on signed contracts, they’re a reliable look at what the closings numbers will look like a month to six weeks out. 

Pending sales typically increase until late summer then arc downward. Currently, they have plateaued. That puts July – usually one of the season’s best months for closing – in the same boat as July. That’s based on first-of-the-month numbers that should increase by mid-month when July’s late closings are added to the count.  

The time a home is on the market before selling is another metric to watch. When the number of days decline – which they did in July – it signals increasing demand.  

Outlooks for how this year will end vary. Based on current conditions, sales at an early pre-pandemic level and an annual median price increase dropping into single digits are likely. 

 

Be prepared for a sales roller coaster ride through year’s end.