Lexington Market Review 2022/2023

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Analysis and Predictions

In 2022 the Lexington housing market was dominated by two factors. The changing housing requirements as buyers reacted to the new normal of, for example, hybrid work models that dominated the market in 2020 and 2021 declined, it was replaced by the normal cycle of downsizing, move-up, and relocating sellers. In mid-2022 mortgage interest rates increased dramatically. This increase abruptly put the brakes on the housing market leading to what we are characterizing as “2022 was the year of two halves”. The overall effects of these two factors were a decrease in the number of homes sold to the levels last seen in 2018 and 2019 and that price appreciation was 1-2%, a value much lower than we saw in 2021. Turning our focus on 2023 and beyond we predict the following.

The normal cycle of downsizing, move-up, and relocating sellers will continue with similar number of homes sales as we saw in 2022. This is dependent on sellers realizing that the Lexington housing market, whilst impacted by the mortgage rate increase, did not see the gloom and doom conditions that dominated the national headlines.
Early indications are that some home buyers that were unsuccessful in 2022 are already active in the market. There is some hesitancy with buyers with mortgage rates still over 6% and uncertainty over the medium-term market condition and price appreciation. This hesitancy will subside as mortgage interest rates decline as the year unfolds. As such, we anticipate sales at 2022 levels and slightly positive price appreciation for single family homes in 2023.
The luxury market (homes sale prices over $2.5 million) performed strongly in 2022. But there is over-supply, in part, driven by the dramatic increase in new construction home prices. With almost 1 year of supply already built or previously listed in 2022, 2023 will be dominated by this unsold inventory and new construction homes being completed in 2023. This will put downward pressure on prices in this market. One question we have is “how will developers react to this?”. The answer is uncertain, they should “build cheaper homes” but given the fragmented nature of the developer community this is not certain to occur.
The condominium market will return to the market conditions seen pre-COVID. The high condominium association fees, when compared to surrounding towns, will dampen demand in this market. We predict condominium sales to remain at 45-55 sales per year and price appreciation to remain slightly positive.

Sales Price Distribution

In 2022, homes sold in the Lexington market consisted of new construction (12%), off-market teardowns (6%) and existing homes (82%). In 2022 we see a very similar price distribution to the one seen in 2021 but with an overall decrease in the number of home sales at all price points below $2.5 million. Above $2.5 million we saw a 5% increase.

Demographic Changes

The major demographic changes we are seeing are an increase in the number of Millennials entering the housing market for the first time and an increase in the number of downsizers as the baby boomers reach retirement age. In 2020 and 2021 these demographic shifts were overshadowed by changing housing requirements as buyers reacted to the new normal of, for example, hybrid work models. 2022 saw a return to the pre-COVID environment with homes sales declining to the 2018/2019 levels.

Having stated, along with major mortgage analysts, for the last few years that mortgage rates are anticipated to remain at a low level, 2022 broke this trend with rates rising rapidly in mid-2022. As we have shown this had a major impact on the second half of 2022. The mortgage rate is projected to decline throughout 2023 and 2024 and we can therefore anticipate buyer hesitation to diminish over this period.

Sale Price to List Price Distribution

The real estate market outlook in Lexington is positive with many homes selling with competing offers and selling for at, or above, the asking price. Why then in the strong sellers’ market seen in January - June did 26% of homes sell for less than the asking price? The answer lies with three factors – the presentation, marketing, and pricing strategy in selling the home. Buyers are highly educated about home values and listing a home at too high a price is a clear red-flag to buyers, who then ignore the home until the price drops below market value. Given that as the market corrected in July – December the number of homes that sold below the asking price increased to 32% the factors outlined above will be even more important in 2023 and beyond. A focus on the fundamentals is critical to attain a sale price equal to, or over, the asking price when selling a home in 2023 and beyond. The fundamentals include preparing the home to be move-in ready, presentation of the home including staging, marketing the home including all digital aspects of video, photos, floor-plans, 3D tours and multi-channel advertising campaigns, and realistic pricing are critical.