Knoxville’s housing market remains hot as buyers snap up homes in days and at inflated prices.
Knoxville ranked 13th out of the top 100 metro areas for home price growth for the second quarter of 2022. According to the Federal Housing Finance Agency’s home price index, prices rose 4.9% sequentially and 25.6% year-on-year.
The average selling price in the Knoxville area was $324,500 in July, up more than 14% from July 2021, according to the Knoxville Area Association of Realtors’ August Market Pulse report.
Despite the year-on-year increases, prices are down slightly from this summer’s peak. Realtor.com reported a $9,000 drop from June through August.
Home sales are down. According to KAAR, they fell by 10.1% from June to July.
While the housing market is more expensive and housing supply more limited than before the pandemic, Hancen Sale, KAAR’s government affairs and policy director, told Knox News it’s stabilizing for a post-pandemic world. These questions and answers have been edited for length and clarity.
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How would you describe the housing market in the Knoxville area right now?
Higher interest rates and higher home prices have hurt affordability quite a bit. And it has forced the market to correct and moderate, and that’s not surprising. That was something we expected.
I think we’ll see that throughout the year, but stock levels are still well below pre-pandemic levels. So things should remain fairly stable.
Property prices are still higher than before the pandemic, but have fallen somewhat. Should buyers buy now or wait for prices to drop further?
We probably won’t see a significant drop in home prices in Knoxville and East Tennessee. When we talk about price drops and month-to-month average selling prices, you really shouldn’t read too much into them.
If you see a drop in price, your home doesn’t necessarily have to go down in value. Only the trend has not continued and is beginning to flatten out.
I don’t think the market and the situation we are facing will change significantly anytime soon, especially given the lack of housing we have relative to demand.
At the same time, higher interest rates have an impact, but it’s important to note that interest rates are lower than the rate of inflation. So actually, it’s a surprisingly good time to take out a mortgage when inflation is much higher than the actual effective mortgage rate.
Stock is increased and there are more houses on the market. What does this mean for buyers and sellers?
That’s part of what moderates this market. There are more options, homes are getting fewer offers per listing, and that’s a good thing. We saw a large number of bids on each listing, and we saw bidding wars, and that’s becoming less and less common.
So it’s definitely still a seller’s market in the classic sense. Sellers still have the upper hand, but buyers have regained a good chunk of leverage from what was truly an ultra seller’s market and something that was unhealthy.
So that’s a good thing for homebuyers and really for the stability of our market. The balance between supply and demand was far too great, leading to a situation where prices rose rapidly in an unsustainable manner.
That being said, 40% of homes were sold at an inflated price in July. So it’s still a competitive market, with inventories up 50% year over year but still significantly lower than before the pandemic. Inventory levels are even significantly lower than they were five years ago.
Why are houses still selling within days but not exceeding the asking price as often?
I think it’s the buyers who are beginning to understand that they have more influence in many circumstances. Previously we lived in an era where it was reasonable to expect 10 offers on a home and you had to make a fairly competitive offer, often exceeding the asking price, skipping contingencies.
Buyers have realized that this is not really the situation we are in anymore and we are seeing this situation gradually calming down.
I would say that with higher interest rates, we’re also seeing some of these retail investors — not necessarily institutional investors, but people just buying investment property — begin to exit the market as interest rates rise. So it just created a healthier balance between buyer and seller. And that’s ultimately a good thing.
Knox County is one of the largest counties in the state, but it doesn’t build as many new homes per 10,000 people as Davidson, Rutherford, Williamson, and Hamilton. What does this mean for us?
It’s a really important trend. Over the past 20 years, Knox County has produced less housing than many of its peers on a per capita basis. This has laid the groundwork for the rapid price growth we’ve seen and, in particular, for us to outperform many of our peer cities.
A lot of this has to do with what type of housing or how many single-family homes we allow, but a big part of it is a shortage of multi-family homes. The county has done a particularly poor job of allowing multifamily housing, such as two- and three-family homes, as well as multi-family homes and townhomes.
What are the barriers to building more homes?
Our zone code does not permit development that is not separate from a single family home. Most places do not allow the construction of apartment buildings.
There is no way to stop growth. The only way to stop growth is to make your community undesirable, and no one wants to do that.
We need to look at our zoning, our development policies, and how we can group homes and build different types of homes — multi-family, single-family, townhouses, and everything in between — to fill a gap. Because we don’t have that right now.
Are we seeing a change in the rate at which houses are being built?
We’ve started to see a bit more housing construction in general over the past few years. We have seen that much more housing has been allowed. It wasn’t such a significant increase, but it’s something.
We’ve seen many apartment buildings, particularly in the city of Knoxville and especially downtown, but we’ve still seen a shortage of apartment buildings in the unincorporated portions of the county, in the city of Farragut.
We still produce far too few multi-family houses and the missing medium-sized houses.
Looking ahead to the rest of 2022, what will the housing market look like?
I think we will see continued moderation. We’ll see more balance between buyers and sellers, but there’s really no reason to think we’ll feel any shock that there’s going to be a month where things just change quickly. It becomes stable.
And I think what a lot of people don’t understand is that there are very few instances in history where real estate prices have actually just crashed or nominal real estate prices have gone down. They just got slower. I think that’s really what we’re going to see as Knoxville continues to attract new investment, new residents, and a variety of amenities to come.
Would you like to add anything else to the housing market?
In 2020, homebuyers aged 25 to 34 were the fastest growing segment of the housing market. They applied for mortgages more often than any other age group. And you saw that really reversed in 2021 when interest rates started to rise, and we started to see house prices start to rise.
So it’s very important to think about how this market has impacted younger homebuyers, and especially because Knoxville has a big goal of attracting and retaining more young professionals to keep UT graduates in Knoxville and graduates from other cities to lure to Knoxville. We have not seen adequate growth in this younger demographic.
What we’re seeing in the data is that younger home buyers have really struggled to keep up in 2021. Younger buyers are a demographic that has traditionally not had the same financial resources as older home buyers who can offer cash. They do not have the financial means to forego a number of eventualities and offer favorable contract terms.
So it will be interesting to see how this is reflected in the data. It’s not just an anecdote, it has really impacted the younger generations of homebuyers disproportionately. And these are the very people who have worked so hard to keep and attract Knoxville. I think that’s a really important impact of the last year and a half.