A Tightening Market

High demand and low supply are driving housing prices higher. What’s next?

By Ross Boissoneau | Oct. 6, 2018

The housing market is always reacting to the law of supply and demand. When there’s a glut of homes on the market, prices drop. When demand outstrips supply, prices escalate.
 
So welcome to Traverse City, Petoskey, and Charlevoix — if you’ve got the money.
 
“Home sales are continuing to rise in our area. In certain price ranges there are shortages of availability. So we are seeing multiple offers and consumers willing to pay more than the asking price and more than [its] true value to secure a home in Traverse City,” said Carolyn Collins. Collins is a Realtor with Century 21 Northland and president elect of the Traverse Area Association of Realtors.
 
Homes in or near downtowns, especially in the $100,000-$250,00 price range, are bumping up against a steadily declining number of such homes for sale. Those two forces continue to drive prices up, from an average of $243,762 in 2016, to $264,124 in 2017, to $277,542 this year, according to TAAR.
 
At the same time, the number of sales is decreasing, due to the shrinking inventory. Statistics from TAAR show sales of single-family homes for the year thus far lag behind both 2017 and 2016. This year’s total is 1,976, compared with 2,115 a year ago and 2,149 in 2016.
 
So will the cost of homes continue to rise, pricing even more people out? Is this a bubble that will ultimately burst, as happened in the recession?
 
Both national and local sources say the situation does not seem to portend a housing bubble. Edward Golding of the Urban Institute Housing Finance Policy Center, a veteran of HUD, who has also taught finance at several universities, appeared on a National Public Radio broadcast earlier this year to address the situation. He noted that since 2012, house prices have increased substantially — about 34 percent faster than the prices of most other indices. But that is still far below the housing index in the bubble days: Between 1997 and 2006, house prices outpaced inflation by 84 percent. Golding refused to even use the word “bubble.”
 
In this region, it’s even less likely. “I don’t see any of the historical signs of a real estate bubble in our marketplace,” said Wally Kidd of Kidd & Leavy Real Estate of Petoskey. “We aren’t seeing the speculative nature of real estate. People today are buying real estate to enjoy it. They’re not looking to make a quick buck.”
 
Another signal of the housing industry’s overall health: The financial tech firm Black Knight reports that mortgage delinquencies fell in August and are now down 5.7 percent over July and August, marking the strongest such decline for those months since before 2000. Foreclosure starts also eased in August and are now more than 12 percent below last year’s level.
 
That’s all well and good, but it doesn’t help someone who wants to live in or near downtown Traverse City, Petoskey, Charlevoix or elsewhere across the region. “My concern is that we do not have enough affordable housing,” said Collins. “There is a wide gap between cash buyers who can afford the second home or retirement home and have moved here from out of the area to enjoy what we have to offer, and the first-time buyers or single-wage family buyer who can’t afford to live here because of the high cost of housing.”
 
Another factor pushing sales: People have money now, and they are making home purchases they delayed when the economic outlook was not so rosy. “What we’re reaching is the end of the recovery,” said Bob Pringle of Real Estate One in Traverse City. “The tight inventory is keeping prices up, but it’s slowing.”
 
Judy Porter, a Realtor with Real Estate One in Traverse City, also said the pace of sales has slowed down. She attributes it to several factors, including the time of year, the dwindling supply, and the fact that downtown prices have escalated so much that some who would like to downsize and move to a more central location can’t afford to. “Everybody wants to be downtown, but they don’t want to pay the price,” she said.
 
Porter noted that there are approximately as many single-family residential properties in downtown Traverse City under $200,000 for sale as have gone under contract in the last 30 days. That means there is a one-month supply. Outside the city, there is a three- to four-month supply, demonstrating the popularity of a downtown location.
 
Also contributing to the lack of inventory is the fact that when the housing industry cratered, it took with it the construction industry. Contractors stopped building homes. But now that people want to buy again, there aren’t any five- to ten-year-old homes available. Making matters worse, many of those in the building trades either left the business or moved away, so now contractors and developers can’t build fast enough to keep up with demand, another squeeze that drives prices up.
 
“Labor is more expensive now. When I tell people from outside here what it costs to build, they’re pretty surprised,” said Kidd.
 
Kidd said he also sees the market cooling, and the fact that interest rates are moving upward will also help it reach a more sustainable level. “The lending market has tightened up. They [lenders] have gotten a lot smarter. You’re not seeing the speculation craze. We’ve seen steady marginal price increases,” he said.
 
Pringle said this area’s continued desirability as a resort and retirement community should help to insulate it from any potential downward trends. “There’s a lot of demand for retirement homes and second homes. That props us up. I think we’ll continue to see strong demand keep prices up even if the rest of the state is flat,” he said.
 
So increasing prices, yes; bubble, no. Desirable downtowns, yes; affordable homes there … mmm, not so much.

Note: The photo above shows a downtown Traverse City house listed for $199,000 that was put under contract within 26 days. Photo courtesy of Judy Porter.