What a fascinating time to be in residential real estate! I can’t think of a better quote to summarize today’s housing market than that of the Ancient Greek storyteller, Aesop, “I will have nought to do with a man who can blow hot and cold with the same breath.”
Today’s real estate market is a balancing act of huge demand, limited supply, high sales prices, impressive household wealth, intense inflation, geopolitical conflict, increasing interest rates, supply-chain issues, sky-high material costs, and stagnant construction labor.
The job market is strong, however, that may not last forever, as we have seen job cuts from local employers over the last few weeks. If job cuts continue, while interest rates rise, and the market value of housing relaxes, homeowners may have a more difficult time tapping into their home equity if they need it, and if that happens, all bets are off.
I have been putting quarterly “Lot Reports” together now for about four years. This is the first quarter where I’m not taking historical new construction housing sales data to forecast where I think the lot market is headed, because I think we are heading in a new direction. New mortgage applications dropping by ±40% from last year is the tell.
The first analysis I conducted was year-over-year, first quarter lot sales. I will be the first to admit that first quarter lot sales are not a great measure, as buyers often try to avoid first quarter lot closings as they don’t want to start to build homes in winter conditions. However, even though it’s not a “great measure”, it’s still a measure. Lot sales year-over-year are down approximately 27%.
The next analysis I conducted was year-over-year, first quarter new construction building permits (for the 19 cities that I track that make up the Des Moines Metro). New Construction building permits are down approximately 15%.
Here’s where the “hot and cold” market comes in. The final analysis I ran was a comparison of the vacant lots (single family and townhome lots) in each city that makes up the Des Moines Metro compared with the average annual permits pulled for single family and townhomes in each city. I decided to average them out since 2021 was such a hot year for new construction, and likely an outlier. When comparing the “Vacant Lots” graph to the “Average Permits” graph, remember that a healthy lot market has a 30-month supply of lots. Depending on the city, supply ranges from 11 months on the low end up to 276 months on the high end. However, when the metro is all factored together, we are currently at a 17-month lot supply. Very low.
The data would suggest keep building and developing, but with interest rates, supply chain issues, high material costs, and difficulty finding labor, at least in my opinion, the existing supply might be sufficient in the near term. At least until some certainty comes in global markets. Proceed with caution.