Recently there has been a lot of discussion about the changes in the real estate market. Compared to last year, the Volusia / Flagler market has seen almost 8% fewer closings, shows an active inventory increase of 55%, median time to contract is up by 44.5%, and months supply of inventory has risen from 1.4 months to 2.3 months!
None of this is a surprise considering that interest rates have risen from 3% (or even lower) to over 6% in a matter of months. We are also seeing home builders offer incentives for the first time since the outbreak of the pandemic.
However, there are a few strong reports that seem to challenge the doom and gloom that is being reported. The first came from Zillow and shows that compared to previous years we are at all time lows in inventory and at all time high prices. Another report from Mike DelPrete, from the University of Colorado in Boulder, shows that the average sales price and home sales are down compared to last year but when compared to historical averages are doing very well.
There is no question that the numbers have changed compared to last year. Let's look at the numbers!
Many people like to look at the months supply of inventory. A historically used rule of thumb is that less than five months is considered a seller's market. More than five months is considered a buyer's market. In the past year we have seen a substantial increase in the supply of inventory. However, that's in comparison to the best year in the history of real estate in our market. The months supply was as low as one month at points over the last few years. Today we are seeing an increase but we are still nowhere close to the five months that would be the tipping point. Instead, the months supply of inventory remains at a comparative all time low. With the exception of 2021 and 2022, we are at historically low levels. We are seeing a rise but we are still well below the long term average. In fact, let's look at it over the last fifteen years.
When you look over the long term, the data is really powerful.
Another indicator that we always look into is the time to contract. Over the last few years, we've seen listings come on the market and go under contract in very short order. The time from listing to contract was actually under one week for some time. Today, we are closer to two weeks. While that's a big increase, it is trivial in terms of the typical market. Again, we need to compare the market to what's normal rather than considering what has happened in the past few years.
In general, comparing our current market to last year's market has become commonplace. It has been reported on almost every news outlet. However, last year was almost certainly the best year for real estate in a hundred years. Any comparison between 2021 and another year is like comparing your personal best swim lap time to that of Michael Phelps who holds the most gold records of any Olympian athlete. It is important to take the current market changes into a larger context. A narrow view may make headlines and generate viewership but it is a disservice to the general public who is trying to make decisions about one of the most important decisions in their lives.
The market is shifting. It is very difficult to determine what will happen in the next few years. There have been discussions about a potential crash or price decline in a way that we saw fifteen years ago. The head of the Federal Reserve, Jerome Powell, has predicted that we will have a "soft landing." The intent of the Federal Reserve is to calm inflation and their actions will affect home prices as lending becomes more expensive.
On the whole, there is a shift and we need to be prepared for it. However, we also need to be cognizant of the fact that we are adjusting from the strongest real estate market that we've ever seen. To expect housing price growth in excess of 20% to continue forever is not reasonable. No market can maintain that growth rate and wages have not increased to support that level of growth. If we did see wages rising at 20% or more per year, we would be subject to not only inflation but potentially hyperinflation. The current market corrections are healthy and are not likely to lead to a market crash but will likely lead to reduced price increases.
Where do we go from here? Like your investments into a 401(k) or IRA, the best bet is to stay the course and continue as you would have. If growth returns to historic norms of 4-8% price increases, it still works well for homeowners. Even if there is a short-term correction as the stock market and bond markets have seen, we are likely to see a mild difference.
Unless you have a crystal ball, it's best to stay the course and move forward.