The year is drawing to an end.
It’s been a heck of a year with COVID, with unemployment rates going up, with forbearance, with the election. We had a lot going on and you may also have heard something in the news that we had a really strong real estate market.
So, prices have gone up this year despite all of that, both on a national level as well as on a local level here in the five counties around Milwaukee. A lot of people, both professionals as well as consumers, are asking, “Well, is this sustainable?” And “What’s going to happen in 2021?”
So, we’re going to take a look at the fresh numbers that we have. I also want to take you a little bit on a deep dive on the topic of pricing.
It’s not as linear as you might think.
So, we have fresh numbers from the Milwaukee MLS. And we’re looking at November numbers versus November a year ago and you can see on the supply side homes for sale for the greater Milwaukee area, we are down 33%.
At the same time, homes sold up 24%. So, we have less homes to sell. We are selling more homes, which is the demand side. It doesn’t take a rocket scientist to calculate that prices are going up when you see a scenario like that, 10.3% and with a median sales price of about $240,000.
When you break it down and you look into the Milwaukee County area, you see the same trend, but a little different. 24% down in inventory, but 20% up in demand, and sales and price is up 10.8%. The median sales price in Milwaukee County is now $194,000. It used to be about 132,000 five years ago. So, as you can see, five years makes a huge difference.
In Ozaukee County, we are at 201 homes for sale at the moment, which is down 22%, but sales for November are almost double what they were a year ago.
Average prices went up as well, now at 357,000, that’s a plus of about 5%. So, overall, you see the trend is generally the same. We are short on inventory and we are strong on demand and we are seeing an increase in pricing, but how does that break down?
The first segment I want to look at is up to $350,000. That is your starter home all the way up to the first trade up home, up to 350, and this is the majority of the inventory. This is about 72% of all real estate that we have in the Milwaukee area that falls into this category.
Total inventory is down 31%, units sold are up 19%. So, we have less on the shelf, we’re selling more, and of course, median price is up 11%. So, that’s the result of this. Now, let’s take a look at the middle segment 350 to 700k.
This is where a lot of the new construction falls. New construction is about 500, 550, 600, somewhere in that range. That’s about 21% of the total inventory. So it’s a much, much smaller segment than the under 350. And you see about the same picture in inventory, we’re down 24%, but look at the unit sales, plus 48%. That’s the impact of new construction and that’s also a result of, I believe from what’s going on with COVID, because a lot of people realized they need a bigger home. They need more space. They need a finished basement, bigger yard, maybe home gym, for sure a home office.
Those are all reasons why people are upgrading to a bigger home. And then, typically here in the Milwaukee market, they fall in that middle segment from 350 to 700,000. Median sales price are up, but only 3.3%. So, you notice that as we’re going up in price, the increases in price are not as noticeable than in the lower price segments. And then, when we look at the 700,000 and up segment, so that’s only 7% of the total inventory. It’s a luxury market. Inventory down 16, units sold up 17, and the median sold price is up plus 1%.
Pricing is a lot more complex than you might think. This is just the single family home market and that’s just averaging out across geographies.
It depends which municipality you’re in, but then you have a different dynamic for the condo market. You have a different dynamic for duplexes, small multi-families for land and so forth. But generally, we see the pattern of inventory being low and prices are going up.
What’s trending in Ozaukee? We are seeing a lot of focus this year on Grafton. Grafton is seeing a lot of new construction subdivisions. Cedarburg’s also strong, then Port Washington is seeing a lot of interest, a very affordable price point if you want to live on Lake Michigan and enjoy somewhat of that lifestyle that comes with living on the shore. It’s a lot more affordable up here than down on the North shore. Thiensville and Mequon have been hotspots this year.
When we look at Milwaukee, no surprise for the most part.
The North shore is pretty strong from Whitefish Bay down to Shorewood and into the downtown area. What is a little bit surprising is that you see the market North of Wauwatosa being extremely active this year, and that is Kops park and Cooper park and then, also Washington Heights.
One market that I have been bullish on for the last couple of years is getting more and more attention, which is West Allis. West Allis is a market to keep an eye on. I think we’re going to see a lot of positive things coming out of West Allis. The municipal government has rolled out and developed a lot of initiatives that are benefiting small businesses and housing is following right behind it.
West Allis is strong and is going to be interesting for the next years.
Going back to pricing, our price is going up too fast. It is a big topic and it’s very much debated with the 10% increase on average across the different Milwaukee area markets. The question certainly becomes, is it going up too much?
I want to take a step back and take a look at historic data and what you can see here is the historic appreciation of 3.8% applied theoretically over the last 20 years. So, if we would’ve started out in 2000, then we would have applied just a historic average of 3.8%. This is what it theoretically should have looked like, in theory. Now we’re going to take a look and see what happened in reality.
And I think what’s sparking a lot of the discussions is that we’re now for the first time in 2020 breaking that ceiling and we’re actually seeing home prices higher than we are supposed to see them based on a longstanding historic average. Now, this situation that we have in 2020 may be akin to what we have seen here in 2002 or 2003. So, we will have to watch that carefully over the next years and see how that is going to unfold. The other thing that I want to call a little bit attention to here is that this is on a national level, and we’re looking here at a little over $300,000.
For Milwaukee County, for example, our home prices, and this is general for the Midwest, a lot lower, we’re now at $195,000. So, we have a lot of room to grow, to catch up with the average here. Milwaukee is getting a lot more attention and is becoming a lot more interesting for young people to move into.
And I believe COVID is also driving that because you can work now remotely for a lot of the tech companies and people realize that the cost of living in Milwaukee is very, very favorable. We’ll keep an eye on that and pay attention to what’s going to happen with pricing in the future. But a key to pricing in the future is going to be inventory, and this chart is telling you the story.
We have here the development of inventory in yellow, and you can see inventory going down here all the way from 2010 to 2020, and you see the annual fluctuations in inventory as we’re going through the winter summer cycles. But overall, inventory has been going down for the last 10 years and it’s now so low that it’s almost hard to go lower. So, that curve is flattening out and stabilizing on a very low level.
When you look at home prices, you can see as inventory is going down, there’s more pressure on home prices. So, we will be in this situation and it will not change the balance between supply and demand until we’re finding a way out of that equation. One of them is building more homes, which home builders are trying to do, but it’s very difficult because production cost is so high in Milwaukee and average new construction home by the time you add in a driveway and landscaping, you’re looking at about $500,000-$550,000 if you want granite countertops and real hardwood floors instead of laminate.
That is not affordable. You will remember from before we looked at 72% of the housing market in Milwaukee is just under $350,000. So, for 72% of people that are playing in the market, new construction is not really an answer here to get out of the inventory shortage.
So, over time we will find, we’ll work our way out of this, but as long as we have such an imbalance between supply and demand, I think we’re going to be stuck and we’re going to see more of the price appreciation that we have seen in the last years. So, it seems like the major forecasting and housing analytic companies are thinking along the same lines. We have here some providing 12 month forecast, some are providing a forecast for 2021 as a whole and you can see the majority of them are predicting that appreciation will slow down next year, but we are still going to appreciate based on the supply and demand situation.
I’m on board with that. I believe we will see a similar situation from Milwaukee. I don’t think we’re going to see another plus 10% year, but I do think we are going to continue to see a very strong market and we’re going to see upward pressure on pricing for next year, both for Milwaukee, as well as here for Mequon and Cedarburg and Grafton for the Ozaukee markets. Another area of concern is mortgage debt. So, this has been going through the news, a record of $10 trillion. This smells very much like bubble.
Are we over leveraged? I found some data from the Fed and you can see here from 1980 to today, 2020, how household debt has evolved is a ratio between mortgages as a percentage of disposable personal income.
So, what they’re measuring is simply how much money are people making versus how much are they spending on housing. And you can see historically, we always have been around 5%. Before the bubble, we peeked up to 7.2% and right now, we are surprisingly low at 3.72%. That has to do with inflation and rising wages, but when you look at mortgage debt as a percentage of household income, that $10 trillion here is really not scary at all. You have to put numbers always in context to understand what they really mean. So, not a huge concern here. Let’s take a look at something that is concerning to a lot of people and that is the number of loans that are currently in forbearance and the concern specifically is that many of them could end up as foreclosures. You see that hyped up a lot on the internet.
So, what is forbearance? When somebody is losing their job because of COVID and they can’t afford their mortgage payments, they can request from the lender to be enrolled in a forbearance program and not make mortgage payments, but those payments are not forgiven. They are just deferred until later. And the concern is that they will have to make those payments eventually, and they will not be able to. So, in the beginning when forbearance was rolled out, we had about 5 million loans in the US enrolled in the forbearance program and that number came down considerably. We are now well below 3 million loans here since October. And the question is what happened to those loans that have been taken out of the forbearance program? What happened to those? And when we take a look here, about 55% have been resolved in a positive way. So, they either never stopped making the payments because they’re just enrolled as a precaution.
They thought they might lose their job, but they actually didn’t. So, they kept making payments or they sold their house and paid off the loan, or they got caught up. So 55% have been resolved very, very favorably. Then we have the blue segment, which is about 30% and they either negotiated loan deferral or loan modification with the lender. And then, we have about 14.7% that are still in trouble and they have no loss mitigation plans. Some of them may be underwater, meaning that their house is worth less than what they owe on it, but because the market has done so well over the last years, a very considerable percentage of those will have a very simple option because they have equity in the house because the home prices went up. So, they’re just going to put the home on the market and walk away with a paycheck instead of going foreclosure and wrecking their credit.
So, what goes into housing affordability? Home prices, interest rates, and then income and wages. So, they’re calculating this index and the interesting thing is when you look at 1990 all the way up to 2008, home affordability has been based on this index at around 120, 130. Of course then, the mortgage crisis happened and we’ve seen a lot of additional inventory hit the market to dirt cheap prices.
A lot of builders that overproduced the years prior went out of business here. So, we had a lot of cheap inventory and homes became extremely affordable with almost a 200 on the index. And now, we’re currently trending at about 159. So, that is still very, very good affordability. Why is affordability today better than it was in the late 90s and in the early 2000s? Because we have higher wages and we have lower interest rates. So, even though home prices are higher now, they’re not that much higher than they were back then, but even though home prices are higher now, we have very strong affordability based on the two other factors. So, we’ll keep an eye on that, but this is not a red flag at the moment.
Also in particular, when you look at the Milwaukee market with our median sales price being at 195, compared to the national average now being over 300, Milwaukee remains still a very, very affordable housing market. Speaking of national scale, so here we have the national seller traffic index. So, seller traffic is very, very weak, no surprise, November, December, usually the months when people are not thinking about putting their home on the market.
However, Me and my team have seen it here in November and December. We’ve been extremely busy. We are not catching a break, which is fantastic, but it really speaks for the condition of the housing market currently. Let’s take a quick look at the interest rates. 30 year fixed rate mortgage from Freddie Mac. We are down at 2.71%. I recently had a first time home buyer ask me about this. Everybody’s talking about the interest rates. Is that really so unusual? And well, here’s the answer. If you go back just two years, we were over 5% and everybody thought we were going into 6% territory. And if you want to go back even further into the 1980s, some of the people that have bought their first home in the 1980s may still remember those 14, 15, or 16% interest rates, some with negative amortization that they had on their first home.
Now, what’s the outlook here? I’m not going to go through the details, but you can see here the forecast for the next year, all the way through the fourth quarter of next year and here are the averages. So, bottom line is everybody is of the opinion that mortgage rates are going to stay stable. Personally, I would not be surprised if we’re going to see rates more like 2.7, maybe even 2.5, but we shall see. Now, let’s take a look at some of the lagging and leading indicators because that is going to give us a little bit of an idea of what we can expect from the next month.
The one thing that stood out here is that listings taken have slowed down in November, minus 5.2% in the Milwaukee area MLS. So, why is this concerning? Because we already have low inventory and now, we’re taking fewer listings. So, that is going to put pressure on the market because we’re going to have even less inventory in December and in January. So, that’s not going to help with relieving pressure on pricing. So with that, let’s take a look at what we might be able to expect reasonably from January.
First of all, the winter slowdown is very, very shallow. My team has been very busy this year in November and December and it will most likely be the strongest winter that we’re going to have on record for the Milwaukee market. The next weeks will most likely be the best time to buy because in spring, we’re going to see upward pressure on prices right away.
Remember from the 10 year chart, we have these annual spikes. Those are prices going up in spring every year. That’s just a seasonality thing. Buyer traffic is going to be expected to increase right after New Year’s. The reason why this is happening is the holidays usually spark a lot of conversations about homes and houses, and then people defer it until after the holidays and next year, and come January 1st, everybody’s on the internet and looking for what might be out there to buy. So, buyer traffic is going to jump right on January 1st and 2nd. Prices expected to increase in spring. Builder confidence remains very, very high. Builders are struggling with labor and with material. So lumber has gone up this year about 80% in price. So, it is a lot more expensive to build a house next year than it has been this year, just because material prices have gone up and also other sorts of material.
If you have lately tried to buy appliances, we have bought a few sets for rental properties, and I am paying about $800 more for a set of stainless steel appliances than I did a year ago. And if you think you can get it in one or two weeks, think again. There’s usually a couple of months lead time. So, we are seeing pressure on pricing here as well. Good news is that contract availability has seasonally improved a little bit. So, if you have a project that you wanted to take care of, right now might be a good time to call a contractor and get on their schedule.
And with that, I would like to wish you and your family happy holidays, all of us a much better year 2021. If you’re interested in more information about real estate in the Milwaukee area, feel free to check out my YouTube channel. There’s a bunch of videos out there with tips and tricks for homeowners, for buyers, and for sellers.