When COVID broke, many news outlets and talking heads assumed housing prices were going to fall. However, JWB had the benefit of experience and access to data that told us otherwise. We predicted that housing prices would not fall in 2020. And I’m happy to report we were right!
Home prices have risen 11.7% from October 2019 to October 2020. The main reason is an incredibly low supply and high demand fueled by historically low-interest rates and high net migration to the southeast due to the pandemic.
Our knowledge of Months of Inventory (MOI) in Jacksonville was one major reason we predicted that home values would not fall in 2020 due to the pandemic. To calculate MOI, you simply take the number of homes on the market and divide it by the total number of home sales in the previous month. An equilibrium market is known to be between 6-7 months of inventory and that should equate to normal levels of home price appreciation over the next 6-12 months. If the MOI is below 6, that would lead to upward pressure on pricing and higher-then-normal home price appreciation in the short run. The opposite would be true if MOI levels go above 7 months of inventory. There would be downward pressure on pricing and, if MOI levels went far enough above 7, you would expect to see pricing declines in the short run.
As you can see on the chart below, MOI has been well below 6 for many years. In March 2020, when the pandemic took hold in the US, our MOI was 3. Knowing that supply levels were most likely going to remain low, we just didn’t anticipate demand falling to a level that would ultimately drive a pricing decline.
As it turns out, we were right. However, no one predicted the type of increased demand we would see from the COVID economy.
The chart reveals that our MOI as of October 2020 is only 1.5 months. JWB has been tracking MOI monthly since 2014 and we’ve never seen it that low. We are now under 5,000 homes on the market in Jacksonville and we’re seeing home sales numbers rise well above 3,000 per month. This should provide a lot of confidence to investors that home prices are not likely to fall in 2021.
Although I’ve tried to walk you through our methodology as far as predicting where home prices would land due to COVID, I have to let you know that short-term pricing is the least important factor when choosing to invest in rental properties. I say this because history shows us that real estate appreciation rates tend to repeat themselves in a given market when you invest for a full market cycle (10-20 years). This should take some of the pressure off your decision to invest. You don’t have to know what prices are going to do in the next year or next five years. You just have to buy a property in the right market to produce positive cash flow today and your property should appreciate at the historically accurate rate on average each year if you give it a full market cycle. In Jacksonville, our historically accurate home price appreciation rate is 4.3% since 1991.* You just won’t find another cash flow positive market that also has such high historical long-term appreciation levels as you get in Jacksonville and that’s why it has become such a popular choice for investors to build their rental property portfolios.
