David O'Neill, Fayette County PVA
Each year for the Chevy Chaser/Southsider real estate issue, I scour the PVA statistical database for clues as to the state of the local real estate market. This time last year, the market was as robust as ever even though we were ankle deep into a global pandemic and all the economic uncertainty that follows. Fast forward to today when we now have more than a full year of real estate transactions to analyze.
So, what have we learned?
For the best year-over-year comparisons, we are looking at the same six communities we highlighted last year: neighborhoods totaling 11,500 homes, or 12 percent of the county’s total number of single-family detached homes. The bottom line is even though the pandemic has been devastating for a lot of industries in a lot of ways, the real estate market is not one of them. The number of homes sold within this study area during the past 12 months increased slightly over the same period the previous year, with the median sale price rising 6 percent to $370,000. In the past year, 5 percent of the total homes in the study area went on the market and sold – a robust turnover rate, but one that is still below the county average of 7 percent.
Countywide, the number of sales increased slightly year over year, but the median sale price jumped a surprising 13.4 percent to $220,000. Yes, you are reading that correctly. The median sale price in Lexington is now more than $200,000. If you have not taken a statistics course in a while, median means half of all sales are below that number and half are above it.
A market opinion I hear most often is we are in a housing bubble. But I do not believe that is accurate, and here’s why: Bubbles are generally associated with seemingly irrational exuberance, such as GameStop stock or Bitcoin – market reactions mostly driven by fear of missing out on the next big thing. That’s not exactly how one would characterize the current housing market.
To those who subscribe to the “bubble” school of thought, comparing the current real estate market to halcyon days of 2005 and 2006, I would highlight one significant distinction. While it’s true that today’s low interest rates are contributing to the thriving market conditions, a desire to lock in favorable interest rates is hardly irrational. The more significant driver today versus 15 years ago is the pent-up demand for housing and a chronic lack of supply. Stock is simply not being replenished.
The great recession of 2008-09 brought about a dramatic drop in the number of new houses built each year – down to between 500 and 600 annually – to the same levels we continue to see today. In terms of demand, Lexington has grown historically by about 1.2 percent per year. With a population near 325,000, even a 1 percent growth rate would add 3,250 people or roughly 1,500 households to our ranks. Since we are only building an average of 550 single-family housing units per year, the other almost 1,000 households are forced to look elsewhere, including rental units and in other cities. It is not a coincidence that most of the counties contiguous to Fayette are growing at a faster rate. Nor is it a coincidence that for the past few years our growth rate has been sporadic and sometimes well below 1 percent. Many folks are deciding to live in surrounding communities, whether by choice or necessity.
The choice is most likely one of affordability – not to be confused with low income “affordable housing” programs, which is probably the segment of the housing market where the need for greater supply is most dire, at least in humanitarian terms. Affordability is an issue of one’s individual budget, needs and desires – where can they find what they are looking for or at least where can they get the biggest bang for their buck.
Remember that half of the market we discussed earlier, the half that is below $200,000? This is precisely the segment of the market we are not replenishing with new housing stock – at least not with new owner-occupied housing stock. This is the segment we would characterize as starter homes. The number of homes that sold in the past 12 months under $200,000 was down 20 percent from the same period the previous year, a trend almost certain to continue.
Of the new homes built and sold in 2020 or later, only 16 sold for less than $200,000 and seven of those were within a single townhouse development. The remaining nine were all single-family detached houses, but four of those were built by and for and sold to Habitat for Humanity clients. They were not available for sale to the general public – and therefore not arms-length sales. The other five were mostly in the newer section of Masterson Station and in Kearney Ridge, with one notable exception built and marketed by minority-owned businesses on Michigan Street for $133,000.
These chronic supply and demand imbalances are not unique to Lexington; communities across the country are experiencing similar pains. But there is one significant difference in Lexington separating us from surrounding communities, and for most communities around the country, for that matter: the availability of buildable land.
The reason you can get more house for your money in Madison Country than you can in Fayette County is the cost of the land. Labor cost is roughly the same – and in short supply everywhere. As builders are quick to remind you, lumber costs are up about 400 percent since the pandemic, but roughly the same regardless of the county. The bigger difference is Lexington’s urban growth boundary that artificially limits the supply of land we have available for building new homes, and as a result, the land inside the urban service area is more valuable. This is not a bad strategy for preserving all that is special and unique about Lexington, but it is a deliberate choice and one that should be understood and considered by the entire community.
View the breakdowns of Lexington residential statistics below.
