2023 Year End Single Family Market Analysis- Kansas City MSA

It is no secret that interest rates were the primary driver for 2023. Meanwhile, builders are reluctant to carry additional spec inventory at 8%+ interest on construction loans have drastically decreased production. The result leaves us starting 2024 with relatively low inventory levels. While I don't have a crystal ball, demand indicators have been improving in the later part of 2023. This seems to indicate we are going to have demand in the spring that out strips the supply. For 2023 I put together a model that reflected my projection for 2023. It is comprised of sales and building permits and the resulting inventory level. As you can see below, we nearly hit the inventory level dead on. (Actual 1681 available home vs a projected 1785). What I didn't do well was project how we would get there. Sales didn't decline as far or rebound as fast. Building permits went down faster and deeper than anticipated. As you can see, this set up is totally different than that '08 housing crisis. The supply- demand equilibrium has been held in check, and while demand has slowed it hasn't resulted in a huge bubble of inventory. I explore a little more in depth how we got here and where I think we are headed below.

Demand Summary: ? Average 30-yr mortgage rates started their steep increase starting in December of 2021 at 3.1% and appeared to reach their peak in October of 2023 at 7.62%. The result has limited buying power and cooled demand for homes. Existing sellers are locked into their homes, not wanting to leave 3% mortgages for a 7.5% mortgage. For the past few years demand for new homes has been extremely hard to monitor as demand had frequently out stripped supply, buyers left the market without transacting as they were unable to locate a home of their liking. The indicators we monitored during that time period were: % of list price received and days on market. During the more balanced market of 2023 we were able to get back to the fundamentals of watching sales and pending numbers. During Q4, I have seen several indicators that make me believe that March of 2023 was the bottom in terms of consumer demand. First, we have seen consistent growth in the number of pending new home contracts (T-12). Second, we have seen the composite % of list price received move sideways (T-12), after dropping for 11 straight months and finally we have also seen the % of new home contracts rise. This change in the Existing/New Sales mix seems to indicate that the existing home inventory is not satisfying the demand, leading people to buy new. Anecdotally, our traffic during the 4th Quarter was extremely strong in spite of less than ideal weather. We anticipate that life changes (relocations/downsizings/upsizings) will drive a more active spring than we saw in 2023

Supply Summary:?From 2019-2021 many new homes were going under contract before foundation, leading to a really long period of time between contract and closing. In the Chart below you can see during that time period significantly more homes were going under contract than were closing. There was concern about contract cancellations resulting in a spike in inventory. For all of 2022 and 2023 there were significantly more closings than pendings, that seem to indicate that those contracts by and large did indeed close, resolving that concern. As previously mentioned, the sharp spike in interest rates is effecting both the supply of new homes and existing homes. According to the Federal Housing Financing Agency, the Average interest rate of a homeowner for both Kansas and Missouri was 4.1% in September. For most of 2023 the interest rates spread between what was available to a home owner and the rate they had was almost 3%. This locked them in their homes and thus deprived the market of a supply of existing inventory. Consumers are beginning to see a light at the end of the tunnel with mortgage rates dropping for the last 3 months. Builders, on the other hand, have not seen relief. Prime is hanging tight at 8.5% still 5.25% over its March 2020 low of 3.25%. This has increased the carrying costs of speculative inventory and thus continued to suppress housing starts and subsequently inventory. Supply is not evenly distributed through the price points. For instance, there is less than a 0.5 Month supply of homes in Johnson County under $450K, While there is an 4.5 month supply from $700-$900K. 2023 brought the lowest number of building permits pulled for the Kansas City MSA since 2011. In the chart below comparing a 12 month average of new home sales to an adjusted building permit number, you can see that the slow down in building permits significantly out stripped new home sales. The Obvious result will be a decrease in inventory. With a lead time of 10+ months, the depletion of inventory in the spring will drain the current inventory and leave a deficit before it can be replaced

I hope you find our insight here at GRATA helpful and I hope that it serves as a basis for a conversation about what is really happening here in the Kansas City housing market. I would really like to hear what you think of our analysis and what you are seeing as a participant in this market.

Thanks for reading!

Travis Schram

President

GRATA Development