For the past few years, I have helped review and analyze local real estate sales trends gleaned from the PVA statistics database. In some years, the trend has only been a continuation of the previous year. Some years it was mostly about recovering from a recession or pandemic or deciphering whether the market was in a “bubble” or not. All of the above best describes where we are in 2022 and marks our tenth year of uninterrupted annual home price increases.
The market remains very active despite recent interest rate increases.
Let’s first dispel a common misconception – that the dramatic increase in house prices has only happened in the past couple of years since, or maybe even because of the pandemic. A snapshot of the median sale price in April of every year since 2017 (below) tells a different story. The period between April 2017 and April 2020, pre-pandemic, saw median sale prices increase by $28,000, or 15%. Between April 2020 and April 2022, post-pandemic median sale prices increased by $42,000, or 19%.
The increase has been more marked in the last two years, but the gains are not a recent phenomenon. They have risen steadily since the post-recession recovery began in 2012, when the median selling price was $146,000, compared to $260,000 today. This is an increase of almost 80% in 10 years.
Housing prices depend on supply and demand. The limited availability of land and labor has combined to limit the supply of new homes coming online each year, and low interest rates have helped sustain already strong demand. The number of new homes built has hovered around 500 per year, with slight fluctuations over the past decade. In calendar year 2021, the median selling price for a newly built home was nearly $370,000, more than $100,000 more than existing inventory.
Over the past 12 months, less than 400 newly built homes have resulted in a sale. (Note: this number does not include those custom-built for a homeowner who never reached the open market.) Of those 400 newly built homes, only 10 sold for less than $200,000, none of which sold for less than $200,000. was marketed for sale to the public. Most of these 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 other three were built for investors as rental properties.
In terms of price, the bottom quartile of new homes sold is between $200,000 and $300,000. In previous years, this market segment would have been marketed as “starting houses”. One wonders if we are still building individual single-family homes.
When it comes to affordability, higher-density attached housing such as townhouses, condos, and duplexes can be a solid option for first-time home buyers. Townhouses, historically, have been a cheaper route to home ownership than a traditional home, and that remains true today. The median sale price for townhouses over the past 12 months was $181,000, up 9% from $166,000 year-over-year and still nearly 30% below the $260,000 median sale price for a single-family home in Lexington.
Given our housing shortage, not just in Lexington but almost everywhere, and given the city’s strategic plan to meet housing demand by increasing density through urban infill rather than expanding urban service boundaries , why aren’t we building more townhouses? While there are likely many reasons, chief among them are outdated stereotypes about higher-density, low-cost housing options moving into an existing neighborhood. Communities, particularly neighborhood associations, have mounted strong resistance to every townhouse development project in recent memory.
Overcoming neighborhood objections often comes at a significant cost to a developer and is ultimately passed on to the consumer. These battles are usually over zoning changes, but in one recent case, the neighborhood went on the offensive and crossed a historic overlay, preventing the development of a few high-end townhouses on a major corridor – precisely where the overall city plan identifies the need to increase density.
This added complexity makes townhouse infill development less attractive to developers and has resulted in higher prices for relatively low-built townhouses. Over the past two years, the median selling price of a newly built townhouse is $371,000, about the same as a newly built single family home.
Like many cities, Lexington has seen an influx of out-of-state real estate investment. 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 the similar investments of the previous two years.
We are in a seller’s market and many real estate investors have sold properties at a significant profit. The downside of these profits for the investor is the potential capital gains tax. However, a tax shelter known as a 1031 exchange allows the seller to immediately reinvest profits in similar real estate and defer capital gains tax until a future sale or even defer it to potential heirs of the investors. Money from 1031 exchanges has long been a factor in the commercial real estate market, but it is a more recent phenomenon in the agricultural market.
If you’re thinking of taking advantage of the seller’s market to make a profit on your home, there’s probably never been a better opportunity. After the sale, however, you then become a buyer in a seller’s market. Competition among potential buyers is fierce, including bidding wars, selling prices above asking, and properties selling blind in hours.
What does all this mean for owners? If you’re thinking of taking advantage of the seller’s market to make a profit on your home, there’s probably never been a better opportunity. After the sale, however, you then become a buyer in a seller’s market. Competition among potential buyers is fierce, including bidding wars, selling prices above asking, and properties selling blind in hours.
If you don’t sell your home, it likely means an increase in property assessments. Homes are usually, but not always, reassessed for tax purposes every four years. Given current trends, an average increase of 30% in four years is more common than not.