PRICING TRENDS, COUNTER-TRENDS AND SURPRISES

The housing market is constantly changing. There are trends, counter-trends and surprises. The trends are what people read about all the time: High interest rates, low inventory and surging housing prices. The counter trends are price decreases, a growing list of seller concessions, and increasing housing construction. The surprises are just that - the unexpected. to understand the surprises, one must learn to think unconventionally. What one thinks cannot happen should be considered possible. What is harder suddenly becomes easy. What was safe now becomes risky. As a new opportunity shows up, another one goes away.

Surprises are also driven by individual transactions in the real estate market. Death, divorce and downsizing are three common ones. They over-ride any considerations determined by the prevailing trends. A recent survey suggested that some 65% of homeowners were waiting for market conditions to change before they would make a decision on buying or selling. Is that pent up demand? Maybe. By contrast, in that same survey, 7% said they needed to sell right away. One can only imagine.

Counter Trends

Counter trends are driven by the inherent limits of the market. For example, as housing prices grow, they become increasingly unaffordable. Rather than reach a saturation point and stay there, prices start to come down. Sometimes, they come down dramatically. Federal Reserve data suggests that when median housing prices reach 8 times the median income level, the price increases become unsustainable and act just like a regular business cycle. So, this is how a counter trend can start. Some experts suggest it is unusual for prices to go down more than 10% in a business cycle before there is an upturn.

Surprise, Surprise

David O'Reilly, the CEO of Howard Hughes Holdings, a real estate development company, reported on June 26 in an interview on CNBC that the market for new houses is better than it appears. More importantly, what he had to say points to how surprises can develop in the real estate market.

Historically, the market for new houses has been smaller than the market for existing house sales. Part of the reason is that new houses are more expensive than a similar house for existing home sales. Mr. O'Reilly reported that has changed recently. He asserts that as of March, the median price for a new house has become lower than the median price for an existing home.

This inversion is all the more unusual because companies like Howard Hughes go into these projects with very definite cost structures in mind. They can and do offer incentives to attract customers who would have considered existing homes instead. Yet, the costs of these houses were still more expensive. So, what has changed? Builders are doing a better job of cost control. This enables them to continue offering incentives to new buyers. It can be argued that inflation continues to have a more negative effect on the existing home market.

That said, there are other considerations. There can be significant state to state variations. For example, in the aggregate, Connecticut has a lot less house construction activity than Florida and other states. Nationwide, new home sales were 698,000 in April and 619,000 in May, while existing home sales were 4,140,000 in April and 4,110,000 in May. This translates into 13-16% of the total market for new home sales. By contrast, the latest information for Connecticut is 10,449 homes on the market, of which 1,125 is new home construction. That constitutes 10.7% of the total. This is substantially lower than in Florida. Since people are moving out of Connecticut, and to Florida, this is what you get.

Some data suggests the most recent median prices for new homes is $433,000 and the median price for existing homes was $387,000 in April 2024. But Mr. O'Reilly asserted that recently, the median prices for newly constructed houses was lower than existing homes. He asserted that this could be a new trend. It stands to reason that if new homes become less expensive, buyers will migrate to the new home market. There is other data suggesting that there are places and cases where the two markets keep trading places as to which one is cheaper. For example, new home median prices hit a seasonal low, in January 2024, of $378,600 and rose to $419,000 in May 2024. That is a 10.5% variation in just 5 months. Meantime, various sources put the median prices for existing homes between $375,000 and $424,000. The important unanswered question is how the market will change if lower prices for new homes persists for a year or more. What will this do to the existing home market?

The pricing trends for housing are a source of constant conjecture. A few months ago, there was more uncertainty over price increases. There was evidence from around the country that some markets were overvalued by 30% or more. Examples include the Atlanta and Tucson markets. Reportedly, these markets are beginning to see price decreases. In Connecticut some have reported that there have been a number of price decreases on various properties spanning the last several months. Is this a reversal of market conditions? Well, still others suggest that the next year or so will return to historical annual increases of 4% or so. Some believe that 2026 prices will essentially be flat. The take home message for all these different views is to expect surprises.