Low inventory, strong demand continue to drive Lexington’s housing market
For the past several years, I’ve contributed a review and analysis of local real estate sale trends gleaned from the PVA statistical database. Some years the trend has been merely a continuation of the prior year. Some years it was mostly about recovering from a recession, a pandemic or deciphering whether the market was in a “bubble” or not. All the above describes where we are in 2022, which marks our 10th year of uninterrupted yearly increases in home prices. The market continues to be very active despite recent interest rate hikes. The number of homes sold since the Federal Reserve’s most recent interest rate hike on June 15 is down substantially from the same period last year, although sale prices remain high.
Let’s clear up a common misconception first: that the dramatic increase in home prices has happened only in the past two years since – or perhaps even because of – the pandemic. The snapshot below illustrating the median sale price in April of each year since 2017 tells a different story. The period between April 2017 and April 2020, pre-pandemic, saw median sale prices increase $28,000, or 15 percent. Between April 2020 and April 2022, post-pandemic median sale prices increased $42,000, or 19 percent.
While the increase was sharper over the past two years, the gains are not a recent phenomenon. They have been rising consistently since the recovery from the recession began in 2012, when the median sale price was $146,000, compared to $260,000 today. That’s an increase of nearly 80 percent in 10 years.
Housing prices are about supply and demand. Limited availability of land and labor have conspired to limit the supply of new houses coming online each year, and low interest rates have helped support an already strong demand. The number of new homes built has hovered near 500 per year, with slight fluctuation over the past decade. In 2021, the median sale price for a newly constructed house was almost $370,000 — more than $100,000 higher than for existing stock.
Over the past 12 months, fewer than 400 newly built houses resulted in a sale. (Note: This number does not include those custom-built for an owner that never reached the open market.) Of those 400 newly built homes, only 10 sold for less than $200,000, none of which were marketed for sale to the public. Most of those 10 were built by Habitat for Humanity or Lexington Community Land Trust and sold to their clients based on income or other restrictions, and the remaining three were built for investors as rental properties.
In terms of price, the bottom quartile of newly built homes sold in the range of $200,000 to $300,000. In previous years, this market segment would have been marketed as “starter homes.” It’s questionable whether we are still building any single-family detached starter homes.
Regarding affordability, higher density, attached housing can be a solid option for homebuyers. While most owner-occupied homes in Lexington are single-family detached houses, this is not the case everywhere. In larger cities, attached housing, such as townhouses, condos and duplexes, make up the majority, and single-family detached homes are the exception. Townhouses, historically, have been a less-expensive path to homeownership than a traditional house, and that remains true today. The median sale price for townhouses over the past 12 months was $181,000, up 9 percent from $166,000 year-over-year and still almost 30 percent less than the $260,000 median sale price for a detached house in Lexington.
Considering not only our housing shortage – not just in Lexington, but almost everywhere – but also the city’s strategic plan for meeting housing demand by increasing density through urban infill rather than expanding the urban service boundary, why aren’t more townhouses being built? While there are likely many reasons, chief among them are out-of-date stereotypes about higher density, lower price point housing options moving into an existing neighborhood. Communities, specifically neighborhood associations, have mounted strong resistance to every proposed townhouse development in recent memory.
Overcoming neighborhood objections often come at a significant cost to a developer and ultimately is passed along to the consumer. These battles are usually over zoning changes, but in one recent case, a neighborhood went on the offensive and pushed through a historic overlay, preventing the development of a few higher-end townhouses on a major corridor — precisely where the city’s comprehensive plan identifies the need for increased density.
This added complexity makes townhouse infill development less attractive to developers and has resulted in higher price points for the relatively few townhomes eventually built. Over the past two years, the median sale price for a newly constructed townhouse is $371,000 — roughly the same as for a newly built single-family detached house.
Like many cities, Lexington has seen an influx of out-of-state real estate investments. Over the past two years, these buyers have spent more than $130 million on single-family residential properties (not including apartments) and more than $40 million on farmland — more than double that of similar investments over the previous two years.
We are in a seller’s market, and many real estate investors have sold properties at significant profit levels. The downside to these profits for the investor is the potential capital gains tax. However, the tax shelter known as a 1031 exchange allows the seller to immediately reinvest the profits in similar real estate and defer the capital gains tax until a future sale or even defer it to the investors’ eventual heirs. Money from 1031 exchanges has long been a factor in the commercial property market but is a more recent phenomenon in the farm market.
What does all this mean for homeowners? If you are considering taking advantage of the seller’s market to make a profit on your house, there’s probably never been a better opportunity. After the sale, however, you then become a buyer in a seller’s market. The competition among potential homebuyers is very stiff, including bidding wars, above-ask sale prices and properties selling sight-unseen in hours.
If you are not selling your home, this probably means increased property tax assessments. Homes are usually, but not always, reassessed for tax purposes every four years. Given the current trends, an average 30 percent increase in four years is more common than not.