These days in the real estate market you hear about a shortage of homes but at the same time there is also talk about slower sales, price drops, and a market is overall more balanced between buyers and sellers. It’s odd that supply and demand is creating a situation like this, although not so odd when you break it down. The real estate market is both hyper local as well as price point sensitive.
Where is the Home Shortage?
When you hear people talk about the shortage of homes there is a specific area the shortage of homes is in: the entry level or first time home buyer market. These are usually lower priced homes that allow new homebuyers to get into the market. First time home buyers typically do not have a lot of money for down payments and often go toward loans that have a lower down payment requirement (FHA – 3.5% down, USDA 0% down, some conventional loans as well offer lower than 20% requirements, as little as 3-5% down for some borrowers).
If you have a home that is sold for $200K and you need a 20% down payment that is $40K in cash the buyer has to bring. You can see why that might be hard for a first time home buyer who has had to pay rent for years.
The current pricing in the market is a problem for 1st time home buyers. Homes in the under $350K area go very fast if they are in decent condition. The problem is that their availability is lacking. The low interest rates of the last few years allowed a lot of buyers to jump into the market at rates around 3%. Some of these were first time buyers but a lot of them were not. Investors and buyers from other areas often could come in and claim cash deals and beat out first time home buyers who had loans. It was a tough situation that has only become more difficult.
How the Lack of Starter Homes Inpact the Step Up Home Inventory
We have a definite need for lower priced homes to help get people into the market. What happens next? The lack of first time home buyer inventory stagnates the middle step up home inventory. If you follow the normal course of events with 1st time home buyers they are starting with a house that isn’t their dream house but is good enough. It’s a landing place, usually within a reasonable driving distance of work, where they can start building equity. They live there for a few years until they have built up enough equity and extra cash to go to a step up house. Often they will see job promotions which increase their income and with the combined extra income and principal payments they’ve been making they have put themselves into a better position.
Only the next step up is farther away than it used to be. They have a 3% interest rate and rates right now are in the 6.25% to 6.5% range. Maybe now isn’t the time. They don’t actually have to move. They can sit tight and continue to may down their mortgage over time while investing their extra income or saving it for the next house to buy…someday.
The middle market now has fewer buyers looking to step up. Those buyers, unless moving in from other areas, don’t have a strong sense of urgency. The middle step up home market starts to slow down, not because people aren’t willing to sell, but because the buyers aren’t willing to buy right now. The middle market in Middle TN seems to have floated up into the $500-750K price range. This is where the vast majority of our inventory is growing the fastest. These are homes that might have 2000 to 2500 sqft. As opposed to the first time home buyer market which was more in the 1600sqft or less range. First time home buyers often start their families at this stage, once they have a child or two they begin to think, maybe it’s time for an upgrade? But financially they see the gap between where they are now and where the next step is and postpone that, maybe just for a little while. Or maybe 17 years like we did.
How About the High End Housing Market
The middle of the market is stagnating and the first time home buyer market doesn’t have much available. What about the high end market? These are buyers who often have been in real estate for a much longer time. They have higher incomes as they have worked a number of years, good savings, investments, and often they can afford to buy more than one home. So if their previous home doesn’t sell, they just rent it out. Many of these buyers are moving from areas with high price points than middle TN and are buying more for less when they come here. This is less and less of the case as our home prices have jumped astronomically over the last several years. The increases now are still happening but at a normal pace, however the damage was done during the low interest phase of the 2020’s.
The New Construction Factor
Building and new construction is also a major factor in everything I’ve already mentioned. The expense of building homes is huge these days. Why does that matter? Supply and demand. We need the homes in the lower price points because that is where the demand is strongest. But the big problem is that everything in the building industry is more expensive. It isn’t economically viable for builders to build in these lower price points.
Material costs are higher, labor costs are higher, and the big one: the LAND costs are ridiculous. In order to actually acquire land that would keep a home price in check to the point where a first time home buyer could potentially buy one, you have to stretch to an hour or more away from Nashville. You have to build smaller houses around 1100-1300 sqft, eliminate garages, or do a 2 bedroom house. And you will still end up in the upper $200’s on that.
Most of the good land for building on has already been built on in this area. You will occasionally find a lot that maybe a person bought as an extra lot for a larger yard. Usually those lots are compromised in some way. In the last couple months I’ve run into several properties that have been in flood plains, protected streams, drainage areas, or steep slopes that make them unbuildable. And the sellers are wanting top dollar for something that is a challenging build at best. Many of these properties also have rock or other features that make it tough to put in septic field lines.
If you add on to all these things together and tack on city approvals and permits (which are necessary for development and building) the first time home buyer house gets even more expensive. Its base line is now above the base line the step up homes used to be at! In Maury county a single family home that would be considered a “starter” home is getting closer to the $400K price point.
Are there Solutions?
The solution to all this, to make homes more affordable, isn’t any one thing. Our economy has shifted and the higher price points are probably here to stay for quite some time. The reality is that the payments need to become more manageable. That will take a combination of creative lending, rate reductions, price drops or seller concessions for point buy downs, as well as revitalizing and repurposing land for residential uses.
I’ll probably discuss some ideas in the future that might help with the growing housing affordbility problem. Check back for updates and if you need help with the real estate market in this strange days give me a call!
Dave Townsend, TriStar Elite Realty C. 931-808-6808 O. 931-548-2300
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