Between national media narratives, interest rate volatility, and the divergent market conditions between the city & suburbs, it seems like no one has a true pulse on what is going on today in the Philadelphia real estate market.
People are confused.
We've seen such a wide range of highs and lows over the past three years, so before I start giving market updates, I'm going to catch you all up on what has been going on over the past few years. I'm going to fully break down the timeline from Covid to present day, showing exactly what has happened in the Philly market, where we currently stand, and where we may be going.
Before we get into it, there are a few basic terms you should know:
MSI (Months of Supply Inventory): This is a measure of how many months it would take for all the current homes for sale on the market to sell, if no other homes came onto the market. A low MSI indicates a seller's market (fewer homes, more buyers), while a high MSI indicates a buyer's market (more homes, fewer buyers). This metric helps both buyers and sellers understand market conditions. Typically, 1-3 Months of Supply indicated a strong sellers market, 4-6 months indicated a balanced market, and 6+ months indicated a buyer's market.
Average Days on Market (DOM): This metric refers to the average number of days a property is listed for sale before it is finally sold or taken off the market. A low average DOM typically suggests a hot market where homes sell quickly. Conversely, a high average DOM could indicate a slower market, potentially due to lower demand, overpriced homes, or less attractive properties.
Median Sales Price: This is the middle price point for all homes sold in a specific area during a certain period of time. Half of the homes sold cost more than the median price, and half cost less. The median sales price is a useful measure because it isn't skewed by extremely high or low prices, giving a more accurate representation of a typical transaction in the area.
Sold Volume: This is the total value of all properties sold over a given period in a specific market. Sold volume helps provide an understanding of the market's overall activity and health. High sold volume could indicate a busy market with many transactions, while low sold volume might suggest fewer sales and potentially less demand.
What Happened During Covid?
For all intents and purposes, we are going to define "Covid" as the timespan between January of 2020 and December of 2021. This was an incredibly interesting time to be in real estate in the city of Philadelphia, due to the state and city's stringent lockdown measures. While every other state in the US considered the real estate industry as essential industry, allowing operations to continue during the pandemic, Pennsylvania was the last state to lift restrictions on the real estate industry, doing so only on May 19, 2020.
As you can imagine, this created market volatility that took place in a very short amount of time, given that real estate agents were barred from entering properties, so much so, that I was almost arrested for opening up a home for my buyers (a home that they already had under contract), during this period of time. Seriously, I was surrounded by police officers and they gave me some sort of citation for being out of my house and operating my business.
Ultimately, in response to the real estate market being locked down, MSI surged 6X in the span of a few months, peaking in June at 6.4 MSI. However, pent-up demand created a sales boom thereafter, bringing MSI back down to low levels almost as swiftly as it rose.
This led to a 2 year boom in real estate that ran through the beginning of 2022, where it felt like everyone was moving. People were moving out of the city for more land, people were moving into the city from New York and DC due to lower cost of living and remote work becoming the norm, people were buying larger homes with extra bedrooms that they could use as offices, etc. You know what happened, you lived through it.
The boom topped out in June of 2021, with an all-time record sales volume for Philadelphia, which hit $750mil+ of real estate sold in 1 month, which you can see below is about 60% higher than the peak months 2017 - 2020, which typically topped out at about $500mil.
So in other words, the market in Philly was smoking hot through 2021, and into 2022.
2022: A Tale of 2 Markets
So going into 2022, the Philly real estate market was riding an all time high, and all signs were pointing to another record year, but then everything started to change right around the time that you started to hear all of the talking heads on TV scream about inflation. 2022 was truly one year the felt like it was divided into two completely separate years, with two completely different markets.
June of 2022 was almost as great of a month as June of 2021, which as mentioned, was a historical, record breaking sales month in Philadelphia. You can see below that the market was just short of breaking another record, and ended up with another $700mil+ sales volume month.
June marked the beginning of a drastic shift in the market. Market conditions felt like they changed about as quickly as they did during covid, but rather than a pandemic impacting real estate, this time it was the Federal Reserve waging war on inflation by raising interest rates. Between March of 2022 and December of 2022, the Fed drastically increased rates, meaning they increased rates from .2% to 4.1%.... this was a 20X increase in the span of 9 months.
The increase in rates resulted in buyers pulling back drastically from purchasing homes. From June of 2022 to December, we saw MSI double from about 2.5 to 4.5, and DOM do about the same going from 36 days to 57 days. June also marked the beginning of an 8 month straight decline in Sold Volume through February of 2023, which made the market feel like it was falling off of a cliff in slow motion. Every month for 8 months, fewer and fewer properties were selling.
2023: Where Do We Stand Today?
The winter of 2023 seemed to be where the market in Philadelphia bottomed out due to the interest rate increases. In February of 2023, MSI & DOM peaked, and sales volume hit it's 8th consecutive month decrease. Sales volume was down about 30-40% Year over Year from 2022, and MSI was more than double.
Since February, it seems that the market has been rallying, but not back to the unprecedented sales levels that we saw the previous two years. As a matter of fact, the market today from a sales volume standpoint is exceeding sales volume numbers that we saw between 2017-2019. As you can see below, the May sales volume number ended up just shy of $500mil in sales, which exceeded the sales volume we saw in May of 2017, May of 2018, and May of 2019.
With this being said, the market feels so much slower than it was 2017-2019. Why is that? Did the past 2 years warp our perspective so much that getting back to a normal sales market feels excruciatingly slow, or are there other factors at play?
The Month's Supply of Inventory (MSI) is the primary factor currently influencing the perceived slowdown in the market, and the main reason that some properties in the Philadelphia market are sitting, while others sell quickly. If you look at MSI numbers from 2017-2019, you'll see that typically MSI hovered between 1-3 months, which is a strong sellers market due to lack of inventory.
Right now, we are currently sitting at a 4 month supply of inventory, and hovering between 4-6 this year. The fact that sales volume is surpassing 2017-2019 figures while the MSI hovers between 3-6 suggests that there are roughly the same number of buyers in the market as there were during 2017-2019, however, there are also more listings currently available on the market. This shift has given buyers a better hand in negotiations, giving buyers more time to make decisions (which is increasing Days on Market and the genera sales cycle in Philly), and also making less appealing or overpriced properties sit on the market for drastically longer than well-price or overly attractive properties.
Predictions for the rest of 2023
Its tough to say where the market will go from here. June figures will provide significant insights into whether we're on track to continue surpassing the markets of 2017-2019, but the main factor keeping the market somewhat balanced right now is the low interest rates of years past, which are locking home owners into their homes for longer periods of time and are keeping people from wanting to sell or move right now. Home owners who are locked in at a 2-3% rate are very reluctant to sell right now, which is helping to keep inventory lower than it would be otherwise.
The listed volume of homes in 2023 is down about 20% per month from what we've seen in spring markets over the past few years, which means that we are seeing drastically fewer home owners who are willing to sell. However, this could yield favorable results for sellers who are bringing renovated properties or new construction properties to the market at reasonable prices.
That's all I have for now. I'll continue to track the market and provide monthly analyses, as well as commentary on the trends we're seeing in the current market to keep you all up to date.. Feel free to reach out to me directly or leave a comment to discuss!
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