KAAR’s “State of Housing” report shows increased prices making Knoxville less affordable

By Kailyn Lamb, Marketing Content Writer and Editor, PYA

The Knoxville Area Association of Realtors (KAAR) released its annual “State of Housing” report earlier this week, giving further detail on local availability of housing and rising costs. Weekend Edition readers will remember our recent article with Hancen Sale, Government Affairs and Policy Director at KAAR, which also covered housing. The annual report looks at trends in Knoxville’s demographics as well as in the market to help better understand housing challenges and how to address them.

Demand for housing of all types in Knoxville has been pushed to “record-breaking levels.” Economic conditions, low mortgage rates, and increased migration in 2021 are some causes. The demand has also made housing prices appreciate faster and brought inventory to an all-time low. Costs grew by double digits compared to the previous year and continue to rise in 2022.

While this is not a problem unique to Knoxville – 80 percent of metros experienced annual home price growth of 10 percent or more – the region fell into the 25 percent of metros that experienced price growth of 20 percent or more.

The report also makes comparisons to the real estate bubble that led to the Great Recession. At the height of the housing market in 2006, only 40 percent of metros saw growth of 10 percent or more. In the current market, lending standards are higher than ever before, according to the report. A disproportionate share of loans is going to borrowers with strong credit history and sizable down payments. Risky lending practices are also lower, with unconventional and adjustable-rate mortgages (ARM) only making up 2 percent of current total mortgage products. Instead of being a temporary bubble, the “State of Housing” report says home price growth in Knoxville results from “a substantial supply and demand imbalance.” Without more housing production, homeownership will be pushed out of reach for a growing portion of the population.

In 2021, Knoxville saw low unemployment rates, a rebounding economy, and more home sales than any other year on record. The total residential sales volume rose from $5.6 billion in 2020 to $7.9 billion in 2021, an increase of more than 40 percent.

Low housing supply was first influenced by uncertainty during the pandemic. Tight inventory also discourages sellers because they have concerns about being able to find their next home with a limited number available in the market. Active listings in the Knoxville metro area were down 36 percent from the prior year as of December 2021, and a whopping 69 percent compared to pre-pandemic levels.

While investor purchases remain relatively low in Knox County compared to the national average, the median price of an investor purchase rose 47 percent from 2019 to 2021. According to the report, this means investors competed with middle-class home buyers more often than in previous years.

In the rental market, there has also been a surge. As in the housing market, an increased demand put pressure on rent and occupancy rates. Rent cost grew at nearly three times the historic average while vacancy rates simultaneously plummeted to record lows. People are also choosing to renew leases at higher rates.

With rising costs, housing affordability has also worsened. In a poll commissioned by KAAR in March 2021, 34 percent of registered voters indicated housing affordability was a big problem, and 28 percent voiced the same concerns about housing availability. The typical home in the Knoxville area is nearly $70,000 more expensive than it was in pre-pandemic years. Although mortgage rates are low and weekly earnings have grown by 13 percent in the same time frame, it’s still not enough to cover the difference, according to the report. In Q4 of 2021, monthly mortgage payments for a typical home were 27 percent higher compared to the year before. With fewer homes on the market, and a majority of buyers only able to afford a small portion of available homes, there is increased competition between buyers. Additionally, homes in the lower price range are the most constrained segment of the market. There are 20,000 fewer low-income homeowners in the Knoxville metro area than 10 years ago, according to the report.

Despite rising costs on both sides of the market, owning a home continues to be more affordable than renting in most of East Tennessee. Attom Data’s “2022 Rental Affordability Report” found Knox County was among the largest mid-sized counties where owning was more affordable than renting. Roane County, on the other hand, was the 2nd most affordable rental market in the U.S.

Although some of Knoxville’s housing inventory issues are pandemic related, the deficit is largely due to “more than a decade of under-building,” according to the “State of Housing” report. Building permits for single-family homes rose by 22 percent from 2020 to 2021 in the Knoxville metro area. However, multifamily building permits declined by 13 percent, despite a boom in multifamily construction across the nation.

The cost of new homes is also increasing. Research from the National Association of Home Builders shows the median price for a new home in Knoxville was $359,502 at the beginning of 2022, affordable only to households with an income of around $81,000 or more. This means that around 70 percent of households in the Knoxville area cannot afford the median price of a new home.

Housing production is lagging behind the recent population and employment growth in Knoxville. The construction industry was still recovering from the loss of thousands of skilled workers after the Great Recession. Current labor shortages are “particularly acute” in the Knoxville area, as construction represents a smaller portion of the overall labor force. Lower hourly wages also have an impact. Rising land costs, inflation, supply chain issues, and the resulting increase in material prices all have impacted production as well.

According to the report, housing market activity is “bound to moderate,” but likely not in the near future. In a Q1 2022 “Market Pulse Survey” from KAAR, a staggering 88 percent of Realtors said they expect home prices to increase over the next year. Home sales will also continue to grow. With new units scheduled for completion, occupancy rates in the rental market could even out slightly this year, but inventory will remain tight. Rent is expected to continue to rise, but at a slower pace.

The final section of the “State of Housing” report focused more on solutions for the housing crisis. Suggestions included policy changes, density planning, land use reform, education in public schools, expanding transportation, and more.

Read the full report here.

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