Here in Frisco and Prosper, just like most other markets around the country, the housing market has gone from crazy to insane. Multiple offers and bidding wars have become the norm, homes are selling for tens of thousands of dollars above list price, repair requests, and appraisals are being waived, and firstborn children are being offered to sweeten the pot for sellers (just kidding)!

How can we not be in a bubble and when will the insanity end are the two questions I have been asked the most over the past several months. Even though it seems like the bidding wars and multiple offer scenarios have been with us forever, they actually haven’t, and I’ve actually seen a few price reductions happen on listings lately! Could the winds of change be blowing?

There are certainly a lot of different opinions out there, which makes it hard to know who to believe, but in this blog, I show you how we got into this rapidly rising price market and let you know what I think we will start to see going forward.

I’ve shared the slides from the video below, but recommend watching the video this week as I cover more of the details and provide explanations that were easier to talk about than write about.

CLICK HERE To See All Frisco and Prosper Homes Listed for Sale in the Last 7 Days

Are We In a Bubble?

That really depends on who you ask. Technically, bubbles occur when there is a rapid rise in the price of an asset, usually caused by exuberance, that does not align with the fundamentals of the asset. So what exactly does that mean? In essence, it means the price of an asset is going up without a fundamental reason or is performing outside of normal economic laws. While there is no doubt the price of homes has been escalating rapidly, the economic law of supply and demand has firmly been in play unlike in 2008 when prices were continuing to rise even though there was plenty of supply.

Here is a graph showing the median sales price of homes in Frisco over the past 10 years. (I’m using Frisco as an example, but a similar trend has occurred in most major cities)

If we were to plot a straight line through this graph from January 2011 until December 2020 you would notice that the rise in home prices had been fairly consistent. However, from January 2021 until now prices have risen sharply.

Here is the same graph looking back over the past 3 years so we can focus more closely on the rise in prices we have seen this year.

So why have home prices risen so rapidly over the past year and even faster in the past 6 months? As mentioned above, the economic law of supply and demand has been firmly at play. For more information on how demand impacts home prices check out this blog post I wrote a few weeks ago. In this post, we are going to focus on the supply side of the equation.

Here is a graph showing the number of homes for sale in Frisco over the past 3 years:

We went from having 1,310 homes for sale in June 2018 to 245 in May 2021. Year-over-year the number of homes for sale is down 68.7%.

Notice when the number of homes for sale reached a low point, January and February 2021. From the average sales price graph above, when did the rapid escalation in home prices begin? January and February 2021. Coincidence?

Does this mean homes are overvalued currently? My belief is yes and no. Let me explain. Regardless of what a buyer, seller, or agent thinks a home is worth, the market is what actually determines value. Market value is defined as the price at which a qualified buyer and qualified seller, free of duress, willingly execute a contract. Given that inventory is so low, and some buyers have no alternative but to find a house to buy, the argument could be made there is some duress in the market on the buy-side. I honestly can’t argue with that, but it certainly isn’t the case in every transaction.

How has that played out when looking at the list price in relation to the sales price of a home?

Homes didn’t start selling for an average of 100% of list price until January 2021 and have been selling for over list price since then. As of May 2021, homes in Frisco are selling for an average of 106.4% of the list price. This is obviously not a sustainable trend.

Where Do We Go From Here?

Buyers are already showing signs of frustration and who can blame them. New mortgage applications are down week-over-week but remain up year-over-year. I don’t want to read much into that just yet, but it could be a sign that buyers are starting to pull back a little bit.

A Story of One House

A house was recently listed that was a match for buyer clients of mine. The home was listed for $599,900. My belief was fair market value was probably $570,000 to $575,000. While the home didn’t end up being right for my buyers, I kept an eye on it. The home received multiple offers and ended up closing for $694,000. Did the value of all homes in that neighborhood suddenly increase by $100,000 in two months? Not necessarily. That house and market conditions at the exact time it was listed meant the house was worth $694,000 to one particular buyer. That doesn’t mean it was worth that price to all buyers.

Here’s what happens though. A neighbor, after seeing that house sell, decides they are going to sell, but they are convinced their home is nicer so they decide to list for $710,000. Another neighbor follows suit, but since their house is also “nicer” they list for $725,000, and so it continues.

Likewise, buyers will reach a point where they say ”I don’t think so” and no offers will come in forcing those homes to start reducing the price if they truly want to sell. Once that happens you will have a lot of people start saying “look, the market is crashing, the bubble is bursting”, but neither will be true. What is true is that sellers who were being overly optimistic with their list prices will start having to reduce the price. Let’s say the final sales price is mid $600’s, remember the original home was listed for $599,900, so even though those homes reduced price the overall market is still appreciating.

Bottom Line

Where home prices settle will be different for every market and every neighborhood. Keep your eyes open for price reductions as they will start to appear, but don’t interpret that as a sign the market is crashing. Year-over-year I expect, and so do the majority of experts, that home prices will continue to appreciate but at a slower pace. I will publish market updates here on my blog as well as my YouTube Channel so keep an eye open for those.

Is now the right time for you to consider buying or selling a home? Let’s talk about it. Schedule a no-obligation call with me today!