The New Markets Metrics
We can no longer continue to view the market through the same lens that we did back in 2019. Inventory has disappeared from nearly every region in the country except for those regions that have been decimated by the pandemic.
We need to reframe this new normal with metrics that give us a clearer sense of the true conditions, such as pending sales.
Of course pending sales have fallen dramatically, but mathematically they have fallen in line with the shrinkage of inventory.
As for days on market technology, and low interest rates have given buyers more power. Concomitantly, credit scores have risen significantly, so buyers and sellers are having to deal with new market functions.
Inventories
Clearly inventories have been falling for over 2 years; in many and most cases, those numbers have been declining by 50% year-over-year. In addition the median price for homes has been increasing, often by double digits and in 2020 by as much as 25% year-over-year.
The traditional pending sales index may no longer be an accurate barometer for judging the trajectory and health of the market. Homes are being pursued and strategically hunted.
As the contract signings have dropped by 10.6% in February, the signings based upon inventory have increased. Buyer demand is clearly stripping seller supply. This points to a very strong market trajectory until inventory and mortgage rates find a more reasonable balance.
So what happened? And how long is this atypical condition going to stand?
The collapse of the available inventory of homes on the market for sale has been an ongoing trend. But it hadn't taken on the massive proportions really until 2020.
Take a look at the two graphs that we have posted from 2018 and 2019, and 2020 and 2021.
February Pending Sales Quotient PSQ
Feb 2020 Feb 2021
Pending Sales 6,374 6,552
Inventory 29,940 14,423
PSQ .21 .45 +1.14%
February Closed Sales Quotient PSQ
Feb 2020 Feb 2021
Pending Sales 4,841 5,431
Inventory 29,940 14,423
PSQ .16 .38 +1.38%
The pending sales appear to be clearly in line, between 6,000 and 7,000 pending sales reported. And even days on market for 2018, 2019 and 2020 were very normal, 67, 65 and 75 days, respectively. But the big hit came in 2020 when days on market in New Jersey fell to an average of 50 days in February 2021. With the average days on market falling by 33%, the average sales price for a single-family home appreciated by 25.6% to $492,000.
Inventory shortages will continue to be the single largest factor affecting the real estate market throughout 2021. There is literally more demand for houses than supply can provide the surging buyers. As long as bidding wars continue to drive houses well beyond their asking price, we can rest assured that there will continue to be shortages of housing for single-family homes throughout New Jersey.
I estimate that it will take two years to bring inventory back to levels of 4 months or more supply.
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