Clock Icon - Technology Webflow Template
12
min read

Q3 R.E. Prices Decline Significantly, Creating a Dilemma for Developers

Real estate was busy in Q3. Here are some of the top developments you need to know based on Parcl Labs analysis.

Residential real estate prices have softened substantially in Q3 across virtually all major US markets. Further, we are seeing faster price declines in new units, which impacts developers disproportionately, given their exposure to new build inventory. Taken together, we believe this leaves developers in a difficult situation–they’ve committed capital and resources at elevated prices and have limited tools to recover their investment, which could lead to heavily discounted prices for new inventory. 

Since the start of the pandemic, volatility in the real estate market has increased and doesn’t show signs of slowing. Having timely, actionable data is paramount to navigating these turbulent waters. In this article, we’ll explore a few of the major themes of the real estate markets in Q3. 

Timely Real Estate Data Matters in a Volatile Market

As of Q3 2022 (July-September 2022), the housing market has begun to abruptly decelerate after two years of steady price appreciation–and there is little consensus on what’s to come. 

In the absence of trustworthy, up-to-date information, real estate decisions are increasingly being driven by fear, uncertainty, and doubt. These decisions can be hugely consequential for consumers and businesses. 

Parcl Labs analysis of the 10 metropolitan statistical areas (MSA) between February and August 2020 (i.e., the outset of the COVID-19 pandemic) found that condominium (condo) sellers who “fear sold” lost 28% of their property value within a 6-week period only to have prices fully recover the following 8 weeks.

Our Q3 market analysis shows that fear is yet again moving markets, and the size of these shifts is highly dependent on location and property type. 

Here are some of the major insights from our data-driven analysis:

  • At the highest level, prices are down across every major US market except New York (+1.4% between July-Sep 2022) — West Coast metropolitan areas face the most dramatic decreases, with San Fransisco down 11.9% and Denver down 7%.
  • Property type matters. Chicago’s relative resistance to downward trends (-0.8%) this quarter appears to be driven by increased condo prices, which rose 3.4% since the April-June time period. In contrast, New York’s condo market was decimated in Q3 — down nearly 10%. Additionally, New York’s overall price increase was driven by a 3.34% price increase in its single family residences.
  • Age matters. In New York, new homes saw a dramatic -30% decrease in average sale price compared to last quarter. Miami, considered a pandemic boom town, also fell prey to this trend, with new homes down nearly 9% this quarter.
  • Housing developers are exposed. Pre-sale activity for new units sharply decreased in Q3, highlighting how some developers may have just missed the peak of the market.
  • Real-time insights that account for property attributes (age, type) and location-specific dynamics can help individuals and organizations with something to lose or gain in this highly volatile market make better decisions. At Parcl Labs, we regularly analyze residential real estate pricing activity at hyperlocal geographical levels, enabling our unparalleled understanding of current market dynamics. Contact our team for early access to the Parcl Labs analytics platform.

9/10 Major Markets Experienced Declines in Q3

With one week to go in the quarter, we are providing an early preview of Q3 for ten of the largest real estate markets in the country:

Map showing Q3 vs Q2 difference PPSQF.

San Francisco takes the lead; down nearly 12% Qtr/Qtr, with Denver following in close second at -7%. Remarkably, New York MSA is holding on by a thread up 1.43%. However, these markets are at a high level and there are a lot of moving parts underneath them.

The story unwinds as we break out condo’s vs. single-family residences:

Chart showing Q3 vs Q2 percent difference PPSQ.

New York is a tale of two property types–condos are down nearly 10% quarter over quarter, while single-family homes are up 3.34%. Miami also shows a large discrepancy between condos and single-family homes at -6.2% and -0.46%, respectively. Single-family homes are driving the downturn in Denver, which is down over 7%.

Going back to the beginning of the year and breaking out homes into 5 or fewer years old, 5 to 15 years old, and 15+ years another story unwinds in New York:

Newer homes (5 or fewer years old) in NY went on an unprecedented run from Q1 to Q2 in 2022, appreciating over 22%. That run has come to a close, with a sharp reversal being down over 30%, coming to a close in Q3. This includes pre-sales of new construction projects.

Age Matters: New Construction Declines Outpace Older Units

Newer construction sells for a premium. Typically buyers want a modern home for convenience —a fixer-upper will require time out of the unit, with significant additional costs, and in today's environment, an unpredictable slew of issues including labor, contractors, supply chain, and lenders. These conveniences come at a premium that folks are willing to pay to reduce friction in the home buying experience.

This dynamic was very pronounced over the last two years in Miami and New York, where newer construction can obtain nearly a 50% premium relative to older units. Generally speaking—it was a function of supply and demand. A robust economic environment coupled with low-interest rates resulted in demand for higher quality new units, which drove prices higher in this segment of the market. However, the environment has shifted, and now fewer buyers want or are willing to pay prior market rates for the same unit. As the environment shifts, there is less demand who are willing or able to pay for the same unit.

Since the peak in NY, newer units have plummeted nearly 40%, while in Miami, there was a decrease of 15%. As demand recedes for new units, we could see temporary support for more affordable middle-aged and older homes.

Charts showing Miami/NY MSA age of home breakout.

The share of sales transactions accounted for by homes 5 years or younger has plummeted by roughly 50% since May/June as the share for middle-aged homes and older homes has increased.

The Developer Dilemma

With rising mortgage rates (above 6% at the time of publishing), elevated housing prices, and slowing economic and wage growth, we are starting to see demand subside.

Housing developers, who just recently faced extreme pressure to address inventory supply constraints with new construction, are now in a precarious position. “Housing starts” refers to the number of new homes begun in a specific time period—usually by developers. 

beginning. The graph below demonstrates that housing starts peaked 8 months ago, around the same time we witnessed record low mortgage rates of ~2.5%. US Census data shows it takes on average 8 months to build a home. Therefore, an influx of newly completed properties are currently hitting the market at the same time as a dramatic decrease in demand for these homes due to rising mortgage rates. In many cases, homebuyers are canceling purchases as they no longer can afford their contracted homes.

Chart showing mortgage rates vs housing starts, 30 year fixed.

Developers are faced with a significant challenge—how to dynamically price these homes in the face of shifting demand and supply. Our analysis shows developers are beginning to heavily discount these newly constructed units. As described in the section above, New York and Miami market activity demonstrate that buyers are no longer willing to pay a hefty premium for newly developed units. Further, our analysis of pre-sale activity in these same markets illustrates that developers are responding to macro economic conditions by slashing pre-sale prices.

Developers need timely, market-specific data to make informed decisions on how to price new units. Pricing decisions should also account for contextual, location-specific factors, described in the deep dive below.

Real Estate is Context Dependent: Your Data Should be Too

The overall share of units in your market, their age, and their characteristics (single family home, condo, size, etc.) play an enormous role in microcosms of activity that drive real estate prices. We know that using context dependent, geographically specific, timely data can be the difference between profit and loss in today’s real estate environment. 

When you track against the appropriate group of homes (whether that be pre-sale activity on condos, homes greater than 1000 square feet 30-40 years old, or otherwise) on a daily basis, you are able to detect faster than anyone else where the markets that matter to you are going.

To illustrate this point, the age of homes differs dramatically in each market - with the median age of units sold over the last 12 months in Las Vegas being less than half of NY, Boston, San Francisco, and Chicago.

Chart showing age of home in years at sale.

Unit age is important because each market has its own age/price sensitivity curve, which is hugely dependent on property type. Single-family homes typically have more flexibility to upgrade to modern features/amenities, while condos are subject to the collective effort of HOA, which can slow upgrade cycles. You can see that new units for condos in these markets that have very old units receive massive markups within the first 0-5 years. However, this premium typically decays at a fairly linear rate over the next 45-60 years. Historical buildings in prime locations are able to get away with charging premiums—as well all know, location, location, location.

Two charts showing price vs age of home for condo and single family.

There are many variables in real estate decision making and each decision is unique. Parcl Labs has created a real-time real estate data analytics platform to adapt to any level of geography and context. Our goal is to empower users with the highest quality data and insights to ensure real estate decisions are driven by correct, accurate, and real-time data.

Contact us to see how we can work together! Be sure to also follow Parcl Labs on Twitter for more real estate insights and updates.

Co-authored by Chief Data Officer Jason Lewis and Vice President, Strategy Lucy Ferguson.

Disclaimer: The material contained on this website is provided for educational and informational purposes only, without any express or implied warranty of any kind. The information on this website does not constitute the provision of investment, tax, legal or other professional advice. No reliance may be placed for any purpose on the information and opinions contained herein or their accuracy or completeness, and nothing contained herein may be relied upon in making any investment decision.