The Growing Gap between Price and Value
Breaking News: Residential Real Estate markets are on fire. Thank you Captain Obvious. No matter the cause, this is always newsworthy in and of itself. What makes this story especially compelling is the fact that it is being written in the middle of a global pandemic with jobs being lost and a larger economic contraction forthcoming. The short answer that explains this recent phenomenon is simple: city dwellers are fleeing concentrated, highly populated areas, and suburban markets are reaping the benefits of their relocation and ability to now work from home. Add to this, historically low-interest rates, fiscal stimulus, and a lack of grounded market awareness, it becomes easier to explain the dramatic surge in home prices. This sounds simple enough but it’s a bit more complicated.
Our Year-End Review reports on how local markets have performed over the span of 2020. Reporting the numbers is the beginning of a larger process that can only be concluded with an explanation behind what we have seen in the last 365 days within the CT Real Estate Market. Our annual research of local market data has revealed aggressive increases in home prices year to date. This is consistent with market conditions that exhibit extremely low levels of inventory and the resulting increases in home sale prices. Low supply and high demand. Many towns throughout the state have seen dramatic activity levels with the number of sales transactions increased by as much as 30-40% year to date. In addition, the median sales price in these very same towns has increased by 8-12% with outliers as high as 16-17% within that same timeframe.
This hearkens back to 2008 when home prices surged, leading up to the eventual financial crisis. The natural instinct is to compare 2020 to 2008. While some similarities exist, we have discovered far more differences that have masked a new wolf in sheep’s clothing. We are in the midst of a global pandemic and housing prices in some areas are at all-time highs! Much of the expected economic and financial hardship has been replaced by fiscal and monetary stimulus. Simply stated, the majority of prospective and actual home buyers are not feeling the financial hardship that precedes a market correction and the resulting drop in home prices. The lower-income classes are experiencing more of the pain associated with the economic downturn created by the pandemic (Service industry employees i.e. servers and bartenders that have been largely shut down due to Covid-19 legislation). However, a large portion of this income class are largely renters rather than potential buyers. At the same time, much of the middle and upper-income classes have maintained gainful employment AND received monetary stimulus, further insulating them from the causes that create financially adverse effects. These are the current forces allowing the local (and non-local) population to continue driving home prices to eventual and unsustainable levels at an undetermined point in the future. No two housing corrections are the same, but they all seem to rhyme when they are boiled down to basic-fundamentals and examined under the lens of an Advisory Approach that takes into account all forces at play, seen and unseen.
This is not to say that buying opportunities do not exist at this time, only that each & every prospective purchase should be vetted on its own merits. The message of local markets right now can be misleading until they are analyzed in broader terms and brought into clear focus. Prices at this time are being driven by heightened demand in the short term. Real Value endures over the long term by closing the gap between the asking price and its underlying value.
Posted by Seaport Real Estate Services on