Assessing Housing Dynamics in a Historic Market

Aaron Scholl - April 12, 2024
Assessing Housing Dynamics in a Historic Market

Over the past four years, the US housing landscape has undergone a significant transformation, characterized by historic listing price growth, an escalating race for space, and dramatic concessions for emerging and existing buyers alike. With the Federal Reserve significantly increasing borrowing costs and persistently high prices, sellers’ benefits have dwindled, signaling a shift towards a new, stable equilibrium in the housing market. As markets continue to settle, this article explores the dynamics that got us here, focusing on changes in the composition of available housing, pricing adjustments for existing sellers, and the decisions of aspiring homebuyers and sellers.

Composition of the Housing Stock

Prices are the most salient feature of the housing market and reflect the underlying dynamics of supply and demand. Traditionally, two primary metrics – the median listing price and the average listing price – are reported to gauge market conditions. While both provide a sense of the typical costs, studying the two jointly provides valuable insights into the composition of housing markets. Consider a hypothetical market with ten available homes, where eight are listed at \$250,000 each, while the remaining two are listed at \$475,000 and \$525,000. The median listing price in this market, at \$250,000, indicates that half of the available homes are priced below this threshold. Conversely, the average listing price, calculated to be \$300,000 and skewed by the presence of higher-priced properties, reveals a broader distribution. This \$50,000 disparity in the two measures of a typical home highlights the composition of available housing. A widening gap indicates an increase in higher-listed properties within the market, while a convergence indicates fewer disproportionately high-priced listings.

The South Dakota market is a prime example of this compositional shift in available housing, reflected in diverging trends between median and average listing prices since 2020. After accounting for inflationary factors (indexed to Q4 2023), median listing prices increased 28.4% from Q4 2020 to Q4 2023, while average listing prices surged 36.2% over the same period. This nearly eight-percentage-point gap in the two metrics indicates a significant increase in disproportionately high-priced listings. More recently, this trend has intensified, with year-over-year changes revealing a 0.9% decrease in median listing prices since Q4 2023, contrasted by a 6.1% increase in average listing prices over the same period. This substantial compositional shift has significant implications for affordability, potentially pricing out many first-time and marginal buyers from the market.

Examining South Dakota’s Upper Midwest neighbors once again underscores the distinctive housing dynamics within South Dakota. While neighboring states also experienced significant housing price growth, they did not exhibit the exceptional divergence in the two metrics observed in South Dakota’s housing market. In fact, among the reported states in Figure 2, South Dakota stands out with the most extreme gap between median and average listing price annual growth since Q4 2022, nearly eight percentage points. Over this period, the composition of available housing units in Nebraska and North Dakota actually shifted towards disproportionately more lower-priced housing available, while Minnesota and Iowa saw slight increases in disproportionately higher-priced homes. This evaluation of housing composition sheds light on the pressing affordability concerns confronting prospective homebuyers throughout the Midwest region.

Pricing Adjustments for Existing Sellers

As the Federal Reserve adjusts borrowing rates and the benefits from high pricing strategies decline, existing sellers in the housing market must also adapt. To align with buyer expectations and the increased costs of financing, sellers who choose to remain in the market must make adjustments along the intensive margin, primarily by revising the established prices of their listed properties.

Figure 3 illustrates the typical number of weekly price changes in South Dakota, suggesting that sellers are indeed responding to market shifts. Longer-term trends reveal a notable increase in the weekly number of reduced-priced listings from Q4 2020 to Q4 2023, rising by 86.1%, or 245 properties undergoing price reductions in a typical week of Q4 2020, increasing to 455 properties undergoing price cuts in a typical week of Q4 2023. More recent data show continued adjustments for existing sellers. Year-over-year changes indicate a 29.6% increase in the number of listings with price reductions since Q4 2022, growing from a typical weekly count of 351 to 455 in Q4 2023. These significant and dramatic intensive adjustments underscore South Dakotan’s awareness of the uniquely high-priced properties available in recent years.

Figure 4 illustrates the varied stages of South Dakota’s neighbors in the pricing adjustment process. While North Dakota and Nebraska share similarities with South Dakota in the number of properties undergoing price changes, Iowa and Minnesota exhibit higher volumes of properties available and undergoing pricing adjustments. Surprisingly, Minnesota and Nebraska have experienced fewer properties undergoing price reductions since Q4 2022. Specifically, Nebraska has seen a decrease from 464 to 459 (decrease of 1.2%) properties with price cuts in a typical week, while Minnesota’s count has dropped from 3336 to 3147 (decrease of 5.7%) properties. Conversely, Iowa and North Dakota have seen increases in the number of reduced-priced listings in a typical week. Iowa’s count has risen by 3.8%, while North Dakota’s has increased by 10.2% since Q4 2022.

Decisions of Emerging Buyers and Sellers

As the housing market continues to settle, the number of new properties available plays a critical role in shaping market dynamics. With an increase in the number of available listings, pressure on rising prices is alleviated, and provides opportunities for prospective buyers, as well as contributes to a more balanced housing market. Figure 5 illustrates the typical number of new listings per week over time.

While persistently high prices have characterized the housing market in South Dakota, the slight dip in the supply of newly available properties in recent years has certainly not alleviated that pressure. Long-term trends in the Upper Midwest suggest that South Dakota and its neighbors have faced challenges in attracting new sellers to the housing market since the end of 2020. Specifically, from Q4 2020 to Q4 2023, South Dakota experienced the smallest reduction in the number of new listings in a typical week, decreasing from 939 to 916, a decrease of 2.4%. Conversely, Minnesota experienced the largest decline of 21.0% in the number of newly listed properties over the same period. Despite remaining lower than 2020 levels, there has been a recent uptick in the number of new listings since the end of 2022 for the region. Notably, Nebraska experienced the most significant year-over-year increase, at 9.6%, while South Dakota saw a gain of 5.0% in the number of new listings in Q4 2023.

It’s essential to explore not only the existing housing supply, as measured by the number of newly listed properties, but also the pipeline of future inventory. Figure 6 illustrates the issuance of new building permits over time and serves as a crucial indicator of construction activity and the potential expansion of the housing stock. Examining trends in building permits alongside the availability of newly listed properties provides a comprehensive understanding of the balance between current supply and future development.

Mirroring the trend observed in the number of existing properties hitting the market, the issuance of new building permits in the region has declined dramatically since 2020. Long-term trends reveal substantial decreases in construction activity, particularly in Minnesota and North Dakota, where the number of new building permits dropped by 42.2% and 57.7%, respectively, from Q4 2020 to Q4 2023. Similarly, South Dakota experienced a notable decline of 15.1% in construction activity over the same period. In the last year, however, there has been extreme divergence in permitting activity across the region. Since Q4 2022, South Dakota and Nebraska have seen the largest year-over-year increases in building permit activity with increases of 29.2% and 7.2%, respectively. In contrast, Iowa, Minnesota, and North Dakota continue to lag in new construction activity with continued decreases of 6.6%, 25.4%, and 60.8%, respectively, over the same period. Moving forward, addressing the region’s shortcomings in the supply of available housing will be critical to ensure that current and prospective buyers have access to affordable housing options in a timely manner.