Nashville hit hard by housing inventory crunch
On the surface, it’s been a stellar 2017 for the Nashville real estate market. In fact, the city’s real estate sector could easily be placed in the national “supernova” category.
In January, Zillow named Nashville the hottest housing market in the country, citing its 13 percent annual appreciation rate, continued population growth and vibrant job market. Six months later, Ten-X, a nationwide online real estate company, also named the city the nation’s best single-family housing market.
Despite the positive press, there are complications hidden ever-so-slightly beneath the surface, concerns that have the potential of intensifying for builders and developers, Realtors, planners, buyers or sellers.
Drilling down to the basics: Nashville has a modest housing inventory, a major factor in yielding the city a so-called “seller’s market.” With inventory steadily declining, prices not surprisingly continue to rise.
Furthermore, people attempting to purchase housing and raw land located in neighborhoods within close proximity of downtown and Midtown Nashville face strong competition and less-than-ideal prices. Similarly, contractors and developers face long waits for permits, escalating labor costs and pricey materials.
The challenges are noteworthy.
“Some of the builders are just throwing their hands in the air,” says John Brittle, founder of the Infill Nashville Team at Parks. “Recently, I spent four hours, for the first time in 10 years, in Maury, Rutherford and Williamson counties with a builder who has over 50 houses built in Nashville. We are going to see builders leaving because it’s easier to build somewhere else.”
Buying frenzy, bidding wars
The second quarter of this year was the market’s strongest on record, according to the Greater Nashville Realtors, and there’s a good chance end-of-year totals will equal 2006’s pre-recession record of 40,000 closings, the organization says.
Second-quarter closings were 11,155, a 2.8 percent increase from the 10,851 closings reported through the second quarter of 2016. Year-to-date closings were up 5.6 percent, with 19,493 closings at mid-year compared to the 18,452 closings reported through mid-year 2016.
But pull back the curtains and there are indications of imperfections, especially regarding available inventory. According to GNR, the June figure was 8,842, down from 9,865 in June 2016.
“Home inventory is too low,” says residential real estate veteran Edsel Charles, head of MarketGraphics Research Group. “The market could use over 600 more specs today.”
No question, buyers are discouraged by the lack of available options, says long-time Nashville-based Realtor Christie Wilson, president of The Wilson Group. Wilson says many buyers must endure nerve-wracking — and unsuccessful — bidding wars before they finally purchase homes.
“The good homes go in three to five days,” Wilson says. “The junky or overpriced stuff goes slower. Homebuyers, especially first-time homebuyers, are having to be very patient. It’s frustrating, but most of them understand what the dynamics are to get into Nashville. Sadly, many typically lose to a multiple-offer situation because people go in so much higher.”
If Nashville is the nation’s hottest residential real estate market — and considering its limited inventory — why isn’t the city seeing more homes built?
Local industry professionals have multiple theories.
“There are a lot of factors at play here,” Brittle says. “Government restrictions and growth have slowed us down a lot. Plus, we don’t have enough homebuilders [in general] and framers, plumbers, electricians, etc. [specifically] to get the job done. So that drives the cost up.
“There are too many people moving to Nashville right now for the housing market to handle,” he adds.
Brittle, who has been active in Nashville’s residential real estate sector for 30 years, began his specialization in infill properties in 1997 when he subdivided his first city lot. In 2005, he founded Infill Nashville, which identifies properties ripe for small-scale development. A large portion of these parcels and homes are located in Davidson County — typically lots with homes that can be razed and replaced with more than one unit or with a higher-end single-family residence.
“I’m seeing some interesting trends,” Brittle says. “We are already seeing an absorption rate that just doesn’t work. There are parts of East Nashville where no one should be building new houses. They have plenty of inventory.
"There are people buying lots where they think they can put two houses but they can only put one,” he adds. “There’s a lot more being built than they think because they don’t study the whole market. The competition is getting really tight, and the developers are willing to go ahead and build and make less per house. That’s going to give us an inventory glut in certain places.
“By the end of this year, I believe we’ll see investors losing money on real estate deals in certain areas,” Brittle predicts. “[They will have] paid too much for a lot because construction costs went up too high and because of added costs related to regulations such as Nashville’s new sidewalk bill.”
Can buyers get what they want?
When you dig deeper into Nashville’s dwindling housing inventory trend, there’s a clue for what type of home is in demand, Wilson points out.
“Look at inventory numbers through RealTracs and you’ll find that the under $300,000 price point is the biggest market in Middle Tennessee,” she says. “There are a lot of young people moving to Nashville who want to buy a home, and they are making this a strong first-time homebuyers market. But at the same time, we have inventory crisis for the first-time homebuyer. We don’t have the buildable lots [in inner-city neighborhoods] to add that kind of housing.”
Like Brittle, Wilson thinks buyers, especially first-time buyers or those in search of homes priced in the $250,000 to $350,000 range, are going to look outside of the city’s fashionable neighborhoods in larger numbers.
“The lot cost is so expensive right now in Nashville, and the costs of labor and materials have gone up so much, it’s created a boomtown kind of market,” Wilson says. “Some people are moving farther out to places like White House for mid-range housing options.
“No question, the market is screaming that we need affordable housing,” Wilson adds. “We’re talking about housing for the person who makes a normal wage of $50,000 to $60,000 a year. Not everyone is making $150,000 a year. Not everyone has parents who can kick in.”
Wilson has a pet peeve about an issue that has been flying under the radar.
"Since 2012, we’ve had out-of-town hedge fund-type groups come in and scoop up 100 properties at a time,” Wilson says. “They’ve been holding them as rentals. So the homes don’t re-enter the market as they typically would.
“First-time homebuyers are usually in their homes for three to five years, and then they resell to another first-time homebuyer,” she adds. “That’s not happening right now with these homes. These investors have come in and clogged up the market. They are holding the properties as rentals. It’s forcing a rental market in our community and driving up prices because of supply and demand.”
Wilson gets calls “all the time” from out-of-town investors looking to buy a bundle of homes.
“I just got a call from someone in L.A. representing a fund,” she says. “They want to scoop up houses to add to their portfolio and find a place to park their money. But they are three years late to the game. The homes just aren’t there for them anymore.”
Larry Lipman, president of The Lipman Group Sotheby’s International Realty, says some buyers are growing apprehensive, sensing a housing crisis similar to the one in 2008.
“We often hear people saying there is going to be another crash — and rightfully so — because people saw how the market was prior to the [previous] crash, and it seems very similar now,” Lipman says. “However, there are a few factors that are drastically different than what we saw previous to the last crash. First and foremost, lending trends have drastically changed.
“Prior to [the Great Recession], money was very easy to acquire,” he continues. “And it was commonly stated that if you could show breath on a mirror, then you could get a loan. In our current market, the loan process is much more complex. Lenders are required to completely document everything and prove that the borrower is able to afford the home they are purchasing.”
While other parts of the United States may be vulnerable to housing market volatility, Lipman believes Nashville is protected.
“Our job market is very stable, and people and jobs are moving into our area at an all-time high rate,” he says. “We may see prices level out over the next few years. However, I feel we will still see an increase in property values.”
Lipman agrees that residential growth and development will inch away from the “it” neighborhoods found on the city’s near north, east and west sides.
“Going forward, there is room to building up to the $350,000 range. However, land is coming at a premium, so we most likely will see the more affordable housing options moving farther from the center core of Nashville,” he says.
Indeed, many — if not most — of Nashville’s fashionable neighborhoods are now out of reach for most first-time homebuyers. This even includes districts such as The Nations and Wedgewood-Houston, which only three or four years ago were still somewhat off the radar.
With the city’s most popular urban neighborhoods — think Germantown, Five Points, Hillsboro-West End and Belmont-Hillsboro — becoming increasingly prohibitive for even mid-level homebuyers, the question is simple: Where are people going to find homes in relatively nice areas located fairly close to downtown and Midtown?
Wilson believes there are still possibilities.
“There are still some really interesting parts of Nashville that are affordable, and I’d count Whites Creek as one of them,” Wilson says, noting the north side area’s appealing large lots. Whites Creek is also located closer, at least geographically, to urban Nashville than many folks realize (despite the psychological separation some contend will always exist).
Wilson concedes Whites Creek lacks sufficient water and sewer infrastructure to support large-scale development, while adding many of its residents oppose growth because they want to keep the heavily rural area as scenic as possible.
Still, she is bullish on the area.
“There are a lot of pieces to puzzle [remaining to be added], but I think we’ll see more happen in Whites Creek in the next five to 10 years.”
In contrast, Lipman says Antioch, located south of downtown, could experience a transformation.
“With the new announcement of coming businesses, Antioch will become even more advantageous for new homeowners,” he says. “This has traditionally been an area where homes are relatively affordable … and will become even more so the case [compared to the city’s pricey districts].”
‘We need this break’
Charles of the MarketGraphics Research Group offers an optimistic take on the market. He recently stated in a guest post on Southern Land Co.’s blog that the Nashville market is “catching its breath.”
“We need this break because lot inventory is down, there is a shortage of labor and everything is jumping in price,” Charles wrote. “As an example, in the last couple of years, framing prices have risen by $2 per foot. The greater Nashville market (minus Montgomery County, which is not included because of military personnel moving on and off the base frequently) is returning to a quality pace of a first-class growing housing market.
“This translates into fewer starts and sales than we have had in the recent past,” he added. “However, this new pace would be welcomed by just about any other region [as] the developers will still be knocking it out of the park. But this pace reduction will give them a chance to catch their breath as well. We forecast a need for an additional 88,000 lots [in the 11 counties comprising the Greater Nashville housing market] by the end of 2021 just to keep up with the demand.”
Although many builders, developers and real estate agents still put a rosy spin on Nashville’s hot market, others aren’t so sure developing new housing in the core of Nashville hasn’t come close to reaching its peak.
Developers face challenges
Shawn Bailes, a Nashville-based investor and developer and president of FBMC Investments, says rezoning and downzoning initiatives spurred by neighborhood groups — coupled with regulations such as Metro Nashville’s new sidewalk ordinance — are slowing housing construction. If not thwarting it altogether.
“There just aren’t a whole lot of buildable lots out there, but the difficulties go beyond that,” Bailes says. “It’s getting and more and more difficult to rezone in the inner-city and increasingly there’s blowback from neighborhoods. We want to develop in the places where the infrastructure exists — and where the neighborhoods already exist — and that puts us in direct conflict with people who don’t want any more growth.
“What many people don’t understand is that to get to that affordable price point of $300,000 to $350,000, developers have to build smaller [residences] because of the land prices. That usually means rezoning and higher density.”
Bailes says small-scale developers, even those with a strong track record in the market, might soon “get pushed out.”
“You have bigger money coming into town that can deal with smaller margins, but the smaller developers can’t,” he says bluntly.
Bailes is displeased about the city’s recently instituted sidewalk plan. In April, the Metro Council approved an ordinance that eliminated a loophole that had allowed builders of single-family homes and duplexes to avoid installing sidewalks.
The newish ordinance doesn’t mandate that new sidewalks be provided on the sites of all future single-family homes and duplexes. However, it does cover the bulk of Davidson County.
With the new policy, developers can still (as was originally the case) choose to instead pay Metro an in-lieu fee, money that would go toward a city-wide fund to build sidewalks. However, that option will not be available if there is an existing sidewalk segment spanning the block on which a new home is constructed or if there is an existing sidewalk segment on an adjacent property. In those cases, the developer will have to install a sidewalk.
“This bill was an uphill battle for developers,” Bailes says. “We tried to combat it as much as we could, but we weren’t going to be the ones who came out against sidewalks.”
Brittle is equally concerned, contending that the added costs are prohibitive for many developers. At the least, they might dissuade builders.
Brittle says a developer wanting to construct a home on an empty corner lot that cost, say, $100,000, might need to spend almost half that amount simply for sidewalks (to span both sides of the lot facing the two streets).
“The sidewalk bill definitely hurts us,” Brittle says. “It will keep developers from developing where they should be building houses that are really needed.”
Bailes and Brittle say every time a neighborhood downzones to prevent denser development (or, more specifically, to prevent duplexes or multi-unit buildings), it pushes affordable housing choices farther out of the city, which, in theory, contributes to traffic gridlock.
“There’s an organized effort in Nashville from people who don’t want any more growth — period,” Brittle says. “It’s not just a NIMBY (not in my backyard) thing like in the old days. It’s now ‘not in my town; not in anybody’s back yard.’ We didn’t use to see people from Richland- West End or Cherokee Park come over and fight a development in Green Hills. But now we do.”
Bailes adds: “You can say, again and again, that density is one of the keys to meeting the demand for affordable housing. But for some reason, many people just can’t hear that argument. They see developers as the ‘greedy bad guys.’
“It’s very hard from our perspective,” he adds. “I know people who are pulling out of the market altogether and going to places friendlier to development such as Huntsville or Chattanooga.”