It could be a great year in real estate in Lancaster if you are a listing agent selling your client’s property. If you’re on the buyer's side, this year could be profitable, but frustrating.
A seller’s market, combined with an economic downturn, will affect the housing market here. There will be fewer houses on the market, even as buyers jockey for position in the marketplace.
2021 Real Estate Market Analysis
Part 1: City Optimism, Struggling Suburbs
by Fred Rehhausser
LancLiving Co-Owner and Chief Economist
The market turns its eye back to urban centers, away from the burbs
The 2000’s were characterized by unbridled home construction as well as a loosening of credit standards and innovations (not all good) in the credit markets. The market crash in 2008 had two long-term effects: new construction lagged over the next decade, as did credit market activity.
On the housing supply side, this lack of new construction left the overall housing market with a shortfall in available housing to meet buyer demand. Additionally, growing environmental awareness and the long term effects of open space preservation (Clean & Green, etc.) are dampening the ability of developers to convert farm and open land to housing stock. On the demand side, credit has become more available and Millennials have begun reaching prime home-buying age, with the first cohorts pushing 40. This resulted in a strong seller’s market and a big run up in prices.
In 2020, the COVID-19 global pandemic took a huge chunk of the market out in the 2nd quarter, some of which was made up for in the 3rd quarter. Overall, COVID dampened both supply and demand as some people were unwilling to risk illness to buy or sell a home.
Homes sold in Lancaster County dropped 6.0% from 2019 to 2020, while dollar volume went up 2.6% and days-on-market dropped from an average of 38 days in 2019 to 34 days in 2020, actually dropping to 21 days in December, 2020.
A better number for a market’s “hotness” is inventory accumulation, or how many months supply of homes are available. This is expressed as available homes divided by homes sold. A “Neutral Market” is considered to be 5-7 months inventory. 2020 has been hovering around 1 month inventory.
In 2021, the market looks to actually be even hotter than it was in 2019 and 2020. Demand will improve beginning in the 2nd quarter as COVID vaccinations are administered and shy buyers reenter the market. The new administration in Washington has promised a focus on housing, and there are indications they will be reducing the Mortgage Insurance rates for FHA loans, as well as improving processing speeds for VA and USDA loans. There are also indications they intend to provide stimulus to the economy, which should also increase demand as people return to work.
Supply will also improve in the second half of 2021, as sellers begin to return to the market post-COVID and fears of having infected strangers in their homes abate. Additionally, we expect to see an uptick in short sales and foreclosures as mortgage relief expires.
Long Term Outlook
Recessions are generally accompanied by weakness in demand and the market moving from a seller’s market to a buyer’s market. As this current downturn is due to an outside shock rather than weakness in fundamentals, demand has remained strong. We expect this to continue for the foreseeable future, as new housing stock has lagged demographic changes. We expect new development to improve, but with a shift towards denser development as available open space for building remains tight. You will see more townhouse developments, brownfield site redevelopment and condo developments as opposed to low density single family homes. The single family home developments that will be built will move upmarket. Flipping will continue to be strong, bringing substandard and obsolete housing stock to modern standards. We expect to see an increase in suburban flipping as that housing stock ages, as well as an increase in multi-unit conversions as municipalities seek to increase their housing stock.
Part 2: Changing Demographics and Competition in the Ranks
Generational changes drive buyers into small cities like Lancaster. Low cost, no frills agencies to suffer as market tightens for buyers.
As baby boomers move into retirement and Millennials begin to become major drivers in the marketplace, small cities, like Lancaster, are becoming more attractive as places to buy property and invest in property.
This changing demographic also means smaller homes, smaller lot sizes, and more focus on neighborhood amenities and walkability, as Millennials push the market toward more socially responsible environments. In contrast to larger cities like New York, Baltimore and Philadelphia, which are becoming less and less attractive due to crumbling infrastructure and ridiculously high rental costs, small cities like Lancaster will benefit disproportionately.
Alternately, rural housing demand will also increase as more people work from home. The big losers are the suburban McMansions.
Move to all-electric houses as oil prices continue to increase, gas prices have bottomed out, and renewable energy (esp. wind & solar) drive electric rates down.
Off-street parking will become more important as electric vehicles become more affordable and widespread.
Energy efficiency needs will be driven by building codes, as energy prices decline and demand is driven by social responsibility rather than affordability. This will also drive an uptick in low waste construction practices.
The historic model for real estate brokerages is characterized by the Century21 model, where the commission split was 50/50 (or a little better for major players) and the brokerage provided a variety of services to the agent: signs, lockboxes, insurance and maybe a gold jacket. Re/Max entered the market with its 100% commission model, where the agent got all the commission, but all services provided by the brokerage were fee based, including the right to hang your license on the wall. They famously declared that they weren't in the real estate business, they were in the office rental business. Fast forward to the 1990’s when Keller Williams created their hybrid model, with 70% commissions and a “cap” to the commissions, although that cap varied by market. Services are still fee-based, but at lower cost than the Re/Max model. In the 2010s we saw the rise of the virtual office, epitomized by eXp, Realty One or Iron Valley. These companies have a flat fee per transaction model, with no services provided by the brokerages. Some of these franchises also have multi-level marketing schemes, such as Keller Williams “profit sharing” and eXp’s “revenue sharing” that are intended to get agents’ help in recruiting.
Today’s big new trend in real estate is the entry of venture capitalists (VC’s) into the brokerage business, bringing huge monetary resources and technology to “reinvent” real estate. This is built in the premise that consumers just want an app to do real estate and that they can build market momentum to dominate the industry to become the Facebook/Amazon of real estate. Redfin, Compass, Orchard and Homie are all examples of these types of companies. Zillow is also making a play in this field, trying to leverage their platform for advantage in the brokerage space.
None of these companies is operating in a vacuum, so these historical generalizations are just that. Each of these companies has diversified their base model in an effort to remain competitive, with Century21 and their Realogy partners (Coldwell Banker, ERA, Sotheby’s, etc.) offering 100% plans and other elements of their competitor’s business models.
There are several trends in today’s business models, including bundling of services, apps and electronic environments, and anti-competitive practices. Historically, anti-competitive practices were more on a personal, discriminatory level, where brokerages tried to exclude undesirable or upstart firms from their local boards or MLS’s. Real Estate Commission enforcement actions have done a lot to suppress these activities. However, with VC and Silicon Valley involvement, the new brokerages are actively working to fence the consumer into a controlled environment and become the gatekeeper between agents and consumers. They have huge sums of money available to them, and can afford to lose money for years in order to dominate the market. The lawsuits back and forth between NAR and Compass, as well as MLS policy changes in response to these lawsuits indicate the industry is actively fighting the dominance attempts. Interestingly, these attempts at market dominance have led to some interesting innovations in the market, including cash offers (Redfin) and bridge loans (Orchard). Homie is actively trying to make bundling of services a competitive advantage (more discussion on that later).
Historically, Realtors were the controllers of information. Multiple Listing Services were books of real estate listings kept at brokerages and consumers would come in the office and look through the book to see properties. In the 1990’s, these books went online, then added syndication and IDX which allowed consumers to find and view listings themselves, removing Realtors from the gatekeeper role. The rise of social media and content algorithms allowed people to limit their environments (often unwittingly) and gave the companies controlling those environments huge amounts of power over individual opinions and behaviors. Emulating Facebook by controlling consumers’ electronic environment is a major goal of a number of VC backed firms, as well as KW with their Kelle app. The idea that you can track everything a consumer does and control what they see is what is bringing huge amounts of venture capital into the industry. I think this is dangerous for the real estate market in general, especially when viewed through the lens of Facebook’s influence on our culture.
Other electronic environmental innovations have greatly improved the business of real estate: e-signature, customer relationship management (CRM), and transaction management software have all greatly improved the customer experience, as have all the advancements in communication technology. Many of the franchise brokerages have integrated applications that manage these aspects of the agents’ business. While this integration can be convenient, there is something to be said for being able to choose best-in-class software.
The real estate transaction is actually a collection of transactions that culminate in the transfer of real property. You have the Realtor, Lender, one or more inspectors, appraisers, title companies (lawyers in some states), conveyancers, insurance agents and potentially numerous others involved in any real estate transaction. The point of entry for most consumers is the Realtor, occasionally the lender. Normally, the Realtor develops relationships with lenders, title companies, inspectors and occasionally insurance agents and recommends their services based on past experience with these service providers. These relationships are rife with potential conflicts of interest, and state regulators have worked hard to limit these conflicts, especially when direct payments are involved. Most enforcement is at the agent level; as you move upstream to the brokerage and the corporate offices, these relationships are much less regulated, provided there is “disclosure”.
When done well, this bundling of services is a great convenience to the customer – they don’t even know the questions to ask to decide which title company or home inspector is the best for their transaction. This is still a gatekeeper role, and the customer is trusting us to look out for them. Abuse of this trust is commonplace, and some franchises have made it their business model.