Lexington Market Review 2022/2023

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Summary

Using a soccer commentators’ cliché, 2022 was a “game of two halves”. The first half of 2022 was a continuation of the very strong seller’s market we saw in 2021. The second half was impacted by rising mortgage interest rates combined with high recent price appreciation and saw the real estate market revert to a more balanced market.

Looking back at our 2021/2022 Market Review our two key predictions for 2022 were firstly for a similar housing market throughout 2022 to what was seen in 2021 with the possibility of decreasing supply as the year unfolds and secondly, the [high] number of homes sales [seen in 2021 and 2022] will stabilize at a lower level than we currently see as sellers, taking advantage of high prices, will be replaced by the normal cycle of downsizing, move-up, and relocating sellers.

Our first prediction was true for the first half of the year with a similar market in 2022 compared to 2021 but was derailed by the rapid rise in mortgage interest rates in the second half of the year compounded by the high price appreciation seen in 2021. Our second prediction was correct with a 17% reduction in the number of homes sales in 2022 compared to 2021.

Given these characteristics many of the key performance metrics – days on the market and sale price/list price ratio - showed a relatively strong market in 2022. But closer examination shows a decline in these metrics as the second half of the year unfolded. The sale price/list price ratio peaked at 116% in May and was at 107% for the full year, but it was at about 100% per month throughout the second half of the year. The average sale price increased by 7% in the first half of the year, but it was flat in the second half. Overall, the average adjusted sale price appreciation was 1-2% for the full year compared to 10% in 2021.

How should we view these numbers? Home sales have reverted to 2018/2019 levels (as anticipated). A 100% sales price/list price ratio was the value seen through each year from 2013-2020. Days on the market were consistent throughout the year at about 17 days (2021 value was 28 days). And so, if we view these against the gloom and doom of the national real estate market it’s clear that the Lexington market weathered the market turmoil caused by the rapid rise in mortgage interest rates very well. Proving that the adage ‘Real Estate is local’ is accurate.

One market worth highlighting is the luxury market (sales over $2.5 million). In 2022 the total number of home sales declined by 17% overall, the luxury market saw a 5% increase in sales and a corresponding strengthening in key performance metrics.

As we look forward what will 2023 bring? Mortgage interest rates are moving downwards with 5.2% predicted by the end of the year and so with less sellers and less hesitant buyers we predict that the overall housing market will revert to the stable market condition seen prior to the COVID years of 2020 and 2021.

Sellers

It is a more challenging picture for sellers than we have seen in recent years. A decrease in supply usually means that buyers compete for homes creating a strong seller’s market. But, after a very strong first half of 2022, the second half saw less, and more hesitant, buyers entering the market because of high interest rates combined with the high price appreciation seen in 2020 and 2021. With high interest rates set to continue throughout 2023 we anticipate similar market conditions to those seen in the second half of 2022. So, to get the maximum price for your home sellers need to focus on the fundamentals when selling – ‘move in’ ready, great staging, a comprehensive marketing strategy (utilizing both digital and traditional channels), and the right pricing strategy to attract the buyers who are looking to buy.

Buyers

While not as strong a sellers’ market as we have seen in 2020 and 2021 and the first half of 2022, the housing market in Lexington will continue to be challenging for buyers. The market will be characterized by low inventory, similar price levels to 2022, and high mortgage interest rates. When the right opportunity arises, buyers must be prepared to act quickly and decisively. It is key to work with an agent who both understands and can educate you on the Lexington market, provide advice on the pros and cons of the home and resale potential of the home, and is able to assist you in structuring a competitive offer.

Home Sales

The high number of homes sales in 2020 and 2021 (25% higher than the homes sales in 2018 and 2019) were a direct result of COVID in that many people re-evaluated what they needed in a home. 2022 saw a return to pre-COVID levels with a 17% reduction in the total number of homes sold compared to 2021. Two factors led to this reduction. Firstly, the number of homes listed in 2022 was 9% lower than in 2021. Secondly, the number of homes that sold, decreased dramatically in the second half of 2022. In 2021, 87% of the homes listed in the first half of the year sold in that year; 80% of the homes listed in the second half of the year sold. In 2022, 82% of the homes listed in the first half of the year sold in that year (only slightly lower than 2021); but only 65% of the homes listed in the second half of the year sold. This is a dramatic reduction, but putting this number in perspective, it is consistent with the sale rate seen in 2018 (we consider 2018 to be the last year we saw a stable housing market as throughout 2019 there was an undercurrent of a pending housing market correction and the sale rate was lower in both halves at 75% and 58%. So, the market in the second half of 2022 was consistent with the balanced housing market we saw in 2018.

Sale Price to List Price Ratio

One of the strongest indicators of demand is the ratio of the sales price to the list price. An average ratio of over 100% means that, on average, there was competition, resulting in buyers competing to buy the home and paying more than the asking price. The Lexington market has seen this indicator at approximately 100% throughout 2013-2020. COVID and the ensuing widespread re-evaluation of what homeowners required in a home saw this indicator rise to 106% in 2021. This high value is indicative of a very strong seller’s market. 2022 saw this indicator rise further to 107% when we aggregate over the full year. This is not the full story though. As noted above, the second half of 2022 was considerably weaker than the first half and this is being masked when aggregating over the full year.

Sale Price to List Price Ratio 2022

Looking at the ratio of the sales price to the list price on a month-by-month basis provides more details of how the market changed in the second half of 2022. When looking at this data it should be noted that this is something of a lagging indicator. The sale price is determined when an offer is accepted, but it is 6-8 weeks later before the home closes and the sale price is made public. The indicator dropped for homes that closed in June and July, partly driven by the large number of homes traditionally listed in April and May, but also because interest rates hit 5% in May. The indicator dropped further (to 100%) as the year progressed and the impact of even higher interest rates (6% by September and 7% by November) impacted buyers’ ability to afford repayments, and the ensuing uncertainty raised by national ‘gloom and doom’ headlines. Remember though that 100% is still a high value (a declining market would see a value below 100%) it is just the comparison of 116% in May and 100% in October through December that is so dramatic.

Average Sale Price

Average prices increased to just over $1.7 million in 2022, an increase of 3%. It’s worth noting that average prices increased by 14% in 2021 and this increase, together with mortgage interest rates over 6%, caused price appreciation to slow in the second half of 2022. Median prices increased to $1.6 million in 2022, an increase of 3%. In prior years we noted that some caution was needed when drawing conclusions from these price appreciation numbers because the sale price distribution showed a large increase in the number of home sales over $2 million. This was also the case this year (we saw home sales decline at most price points, at about 20%, except for the over $2.5M which increased by 6%). Based on this, 3% should be considered somewhat high, with 1-2% the adjusted price appreciation, which is slightly lower than the price appreciation seen in the pre-Covid years.

Average Sale Price (H1/H2 2022)

Following the theme of this section it is worth analyzing average sale prices in the first and second half of 2022. Prices increased 6.7% in the first half of 2022 when compared to 2021 (consistent with the sale price to list price ratio over 100% during this time). In the second half of the year the average declined with the average sale price only 0.25% higher than 2021. Aggregating over the full year gives the 3% we noted previously. We can clearly see a slowing of price appreciation in the second half of 2022 but, even with the 14% price appreciation seen in 2021, average prices have not declined.

Cumulative Home Sales

The cumulative sales data is a weekly snapshot of when homes that were listed in that calendar year had an accepted offer. Graphing accepted offer date, instead of closing date, removes the skew caused by the typical 6–8-week delay between an accepted offer and the home closing, from the data. Cumulative sales of 2022 against 2021 clearly show two characteristics of the market. Firstly, the reduction in home sales occurred throughout the year. It was not directly caused by the mortgage interest rate increase but rather the return to normal market activity post-COVID. Secondly, the graph trends follow the traditional seasonality of Spring and Fall markets with a lull (flattened curve) over the summer months. The graph is therefore indicative of a market returning to normal conditions.