Knoxville Area home sales in April 2023

Market Pulse

May 2023

• Home sales in the Knoxville Area increased in April – up 8.0% from the previous month but down 8.9% from a year ago. Overall, home sales were down 17.5% in the first quarter of 2023.
• Apartment rents in Knoxville were up 10.7% from the previous year in April 2023, compared to 3.2% growth nationally.
• In the first quarter of 2023, home prices across the Knoxville metro area increased 6.1% from the previous year compared to 4.3% growth nationally, according to the FHFA House Price Index.
• Knoxville's economy grew at nearly twice the pace of the U.S. economy in 2022, according to KAAR analysis.
• New listings in April were down more than 20% year-over-year across the Knoxville metro area, according to KAAR analysis of realtor.com data.
• KAAR released its 2023 State of Housing Report this month. The signature report is published annually and provides a comprehensive analysis of East Tennessee's housing landscape using the latest available data.

Reader's Note: All real estate is local. Pay attention to local trends and be careful when you read national news as it doesn't necessarily reflect what's currently happening in East Tennessee.

Home Sales Report

• Knoxville Area home sales decreased in April — down 14.5% from the previous month and down 23.3% from a year ago.
• Median home sales price was $325,000 in April — unchanged from the previous month and down 0.3% from the previous year. However, the median price per SqFt of sold homes was up 3.7% from the previous year.
• Total housing inventory continued to increase – up 43% from a year ago but still approximately 62% below pre-pandemic levels.
• Half of the homes sold were under contract in 9 days or less, down from 16 days in the previous month.
• 30% of homes sold for more than the asking price, up from 24% the previous month, with 15.5% selling for at least $10,000 over asking and 5% selling for at least $25,000 over asking.
• New construction represented 10.5% of total home sales.

KAAR reports home sales patterns using a seasonally adjusted annualized rate (SAAR), an adjusted rate that takes into account typical seasonal fluctuations in data and is expressed as an annual total. Comparing month-over-month housing market data using this method provides a more accurate depiction of home sales.

What you need to know: After consecutive months of accelerating home prices, the median sale price in April declined from the previous year. However, the median price per Sq Ft remained 3.7% above 2022 levels – meaning the actual value of homes after adjusting for size still increased over the past year.

Overall, housing market activity declined considerably in April as a lack of inventory and higher mortgage rates continue to weigh heavily on demand, pushing home sales to their lowest level since November 2022. As of April, new listings were down more than 20% from the previous year – a trend that is likely to (1) persist into the summer months and (2) keep home sales relatively low.

The Knoxville economy grew at nearly twice the pace of the U.S. economy in 2022, according to analysis from KAAR's 2023 State of Housing Report.

From 2015 to 2019, Knoxville’s inflation-adjusted gross domestic product (real GDP) grew at an average annual rate of 2.1%. After a decline in 2020 as a result of the pandemic, Knoxville's real GDP grew 9.3% in 2021 and 4.0% in 2022 – outpacing growth of 5.9% (2021) and 2.1% (2022) nationally.

Although Knoxville’s fast-growing economy is expected to moderate in 2023, competitive real estate prices and a relatively low cost of doing business suggest the region will continue to outpace the U.S. in addition to many of its in-state peers.

After consecutive years of above-average growth, Knoxville’s inflation-adjusted gross domestic product (real GDP) is projected to grow by 1.1% in 2023 and 2.6% in 2024. By comparison, real GDP in Tennessee is expected to grow 0.7% in 2023 and 1.6% in 2024, while U.S. real GDP is forecasted to contract 0.2% in 2023 before growing 1.3% in 2024, according to estimates from the Boyd Center for Business and Economic Research.

Housing inventory rose modestly over the past month. As of the end of May, active listings are up around 45% from the previous year but remain well below their peak in November 2022. For-sale inventory remains well below pre-pandemic levels.

The spring selling season is a little sluggish this year as fewer people are choosing to list their homes for sale, keeping housing inventory suppressed and competition high.

As outlined in KAAR's 2023 State of Housing Report, more than 8 in 10 homeowners with a mortgage are locked in with an interest rate below 5% – well below prevailing rates – creating a powerful financial incentive for people to stay in their current home, or retain their current residence as an investment rental property if and when they do decide to move.

Moreover, such a low inventory environment is to some degree a self-reinforcing cycle: existing homeowners are hesitant to sell their homes due to the uncertainty of finding a new one.

All in all, new listings have been down more than 20% year-over-year throughout the early months of 2023, defying the typical seasonal trend of increased new listings during the spring. As of writing, there are few indications new listings – and thus available inventory – will rise significantly in the near future.

Mortgage Rates Continue to Increase

Mortgage rates were steady throughout May, according to Freddie Mac's Primary Mortgage Market Survey. The average 30-year fixed mortgage rate (30Y FRM) was 6.57% for the week ending May 25, nearly 1.5 percentage points higher than a year ago.

Why It Matters: Mortgage rates are still nearly 1.5 percentage points higher than this time last year, and there are few indications that rates will fall substantially in the near term – partly because inflation remains stubbornly high and well above the Federal Reserve's 2% target rate.

As of mid-May, the required monthly principal and interest payment for the median-priced listing is up more than $300 from the beginning of the year – a trend that is keeping home buyers and sellers on the sidelines. Until affordability conditions improve (i.e. until mortgage rates fall), home sales are likely to stay fairly sluggish.

The current housing affordability crisis is a product of many structural trends, or market conditions that aren't easily shifted in the span of one or two years.

One example is the mismatch between the size of existing homes and the number of people living in them. According to KAAR analysis of U.S. Census data, nearly one-third (1/3) of all households in Knox County are made up of a single person; however, only one-fifth (1/5) of the housing stock are studio and one-bedroom units. To look at it another way, two-thirds of the households have two or fewer people, but nearly two-thirds of housing units in the region have three or more bedrooms.

As a result, households with just one or two people must spend more on a relatively large home, not because they want the extra space but because smaller, more affordable options are simply harder to find.

This leads to an important question: if there is so much pent-up demand for smaller homes, why aren't we building more of them? In addition to rising material and labor costs, government-imposed zoning and land use regulations oftentimes make building smaller homes prohibitively expensive, if not illegal altogether.

For example, many jurisdictions regulate the minimum lot size per housing unit or maximum floorspace-to-lot-size ratio for new residential development. These regulations are often supported by existing homeowners and residents as a means to "maintain the character" of the neighborhood. In practice, however, such regulations exclude lower-income households who could only afford homes that are smaller than what is allowed.

In other words, it's not that smaller (and thus more affordable) homes are strictly illegal; rather, zoning regulations and building codes in many areas effectively make it difficult or impossible to build smaller homes – and East Tennessee is no exception.

So, yes, there are a lot of empty bedrooms out there.