Knoxville’s housing market remains hot as buyers snatch up homes in a matter of days and for over asking price.
Knoxville ranked 13th out of the top 100 metro areas for home price growth during the second quarter of 2022. Prices were up 4.9% over the previous quarter and up 25.6% over the previous year, according to the Federal Housing Finance Agency’s House Price Index.
The average sale price in the Knoxville area in July was $324,500, up more than 14% from July 2021, according to the Knoxville Area Association of Realtors’ August Market Pulse report.
Despite the year-over-year increases, prices have decreased slightly from this summer’s peak. Realtor.com reported a $9,000 dip from June to August.
Home sales are down. They decreased by 10.1% from June to July, according to KAAR.
While the housing market is more expensive and the housing supply is more limited than it was pre-pandemic, KAAR’s governmental affairs and policy director Hancen Sale told Knox News it’s stabilizing for a post-pandemic world. This Q&A has 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 impacted affordability in a pretty substantial way. And it has forced the market to correct and begin to moderate, and that’s not surprising. That was something that we were expecting to see.
I think we’ll continue to see that throughout the year, but inventory’s still far below pre-pandemic levels. So things should remain fairly stable.
Home prices are still higher than before the pandemic, but have seen some decrease. Should buyers buy now or hold out for prices to drop more?
We’re not likely, in Knoxville and in East Tennessee, to see home prices decline in a substantial way. When we talk about price cuts and month-to-month median sale prices, really, you don’t want to read into those too much.
When you see a price cut, it’s not necessarily that your home is dropping in value. It’s just that the trend hasn’t continued and it’s starting to level off.
I don’t think the market and the situation that we face is going to change appreciably anytime soon, particularly with the lack of housing that 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 it’s actually a surprisingly good time to take out a mortgage when inflation is much higher than the actual effective mortgage rate.
Inventory is up and there are more houses on the market. What does that mean for buyers and sellers?
That’s part of what’s moderating this market. There’s more options, homes are receiving less offers per listing, and that’s a good thing. We were seeing a large number of offers on each listing, and we were seeing bidding wars, and that’s becoming less common.
So it’s certainly still a seller’s market in the traditional sense of the word. Sellers still have the upper hand, but buyers have gained a good bit of leverage back from what was really an ultra seller’s market and something that was unhealthy.
So that is a good thing for homebuyers and really, for the stability of our market. The supply-demand balance was much too large, and it created a situation where prices were rapidly appreciating in a way that wasn’t sustainable.
But that being said, 40% of homes in July sold for over asking price. So it’s still a highly competitive market because inventory is up 50% from a year ago, but it’s still substantially lower than what it was pre-pandemic. Inventory is even more substantially lower than what it was five years ago.
Why are homes still selling in a matter of days, but not going over asking price as often?
I think it’s buyers starting to understand that they have more leverage in a lot of circumstances. Previously, we were living through a time where it was reasonable to expect there to be 10 offers on a house and you had to make a pretty competitive offer, which was often over asking price and with contingencies waived.
Buyers have realized that’s no longer really the situation we are in, and we’re starting to see that cool down.
I’ll say with higher rates, I think we’re also seeing some of these small-time investors – not necessarily institutional investors, but people who are just purchasing investment properties – starting to back away from the market with rates rising. So it’s just created a more healthy balance between buyer and seller. And that’s ultimately a good thing.
Knox County is one of the largest counties in the state, yet doesn’t build as many new homes per 10,000 people as Davidson, Rutherford, Williamson and Hamilton. What does that mean for us?
It’s a really important trend. Over the past 20 years, Knox County on a per capita basis has produced housing at a lower rate than many of its peers. That’s what set the stage for the rapid price growth that we’ve seen, and particularly that we’re outpacing a lot of our peer cities.
A lot of that has to do with what type of housing or how much single-family housing we permit, but a huge part of that is a lack of multifamily housing. The county has done a particularly poor job enabling multifamily housing like duplexes and triplexes and apartment buildings and townhomes.
What are the barriers to building more apartments?
Our zoning code does not enable development that’s not single-family detached. Most places do not allow multifamily housing to be built.
There isn’t a way to stop growth. The only way to stop growth is to make your community undesirable, and that’s not something anyone wants to do.
We have to look at to our zoning and our development policies and think about how we can cluster housing and build different types of housing – multifamily, single family, townhomes and everything in between – to fill a gap. Because we don’t have that right now.
Are we seeing any change in the rate of homes being built?
We’ve started to see a bit more home building in general the past few years. We’ve seen a lot more housing permitted. It hasn’t been all that substantial of an increase, but it’s something.
We’ve seen a lot of multi-family development, particularly in the city of Knoxville and especially in downtown, but we’ve still seen a lack of multifamily in the unincorporated parts of the county, in the town of Farragut.
We’re still just vastly under-producing multifamily and that missing middle-type housing.
Looking ahead, how will the residential real estate market look for the rest of 2022?
I think we will see continued moderation. We will see more balance between buyers and sellers, but there really is no reason to believe that we’re going to feel any shock, that there’s going to be any one month where things just rapidly change. It’s going to be stable.
And I think that’s what a lot of people don’t understand is that there’s very few instances in history where home prices have actually just plummeted, or nominal home prices have declined. They’ve just grown slower. I think that’s really what we’re going to see, particularly as Knoxville continues to attract new investment and new residents and there’s a number of different amenities coming.
Anything else you’d like to add about the housing market?
In 2020, homebuyers ages 25 to 34 were the fastest-growing segment of the housing market. They were submitting mortgage applications at a higher rate than any other age group. And you saw that really reverse in 2021 when we started to see rates inch up, and we started to see home prices inch up.
So it’s very important to think about how this market has impacted younger homebuyers, and particularly because a big thing that Knoxville is working on is to attract and retain more young professionals to keep UT graduates in Knoxville and to attract graduates from other cities to Knoxville. We have not seen the appropriate growth in that younger demographic.
What we see in the data is that younger homebuyers were really struggling to keep up in 2021. Younger buyers are a demographic group that traditionally doesn’t have the same financial resources as the older homebuyers who can offer cash. They don’t have the financial resources to waive a number of contingencies and offer favorable contract terms.
So it’s interesting to see it reflected in the data. It’s not just an anecdote, but it has really disproportionately impacted the younger generations of homebuyers. And those are precisely the people that were working so hard to keep and attract to Knoxville. So I think that’s a really important impact of the last year-and-a-half.