Is Nashville in a housing bubble? Market now showing some signs of cooling

This year’s headlines maintained the fever pitch: “Nashville ranked nation's hottest single-family housing market,” “Nashville’s housing market ranked No. 1 by Zillow,” “Should you invest in Nashville's red-hot housing market?”

The region's soaring values — up more than 34 percent over four years — are causing many to wonder: Is Nashville’s housing market in a bubble that’s about to burst?

A few signs are feeding their anxiety. During recent months, some Nashville neighborhoods have seen a distinct slowdown. Sales prices have dropped, the time it takes to sell a home has climbed, and the number of homes sold has slipped, compared to the same months in 2016. Hardest hit have been expensive neighborhoods and those in the urban core flooded with new infill development.

But the correction hasn’t been felt across the region. In less expensive areas like Donelson and parts of Lebanon and Murfreesboro, prices are still climbing by double-digits compared to the previous year, and homes are selling quickly.

While pockets are cooling down, experts don’t expect a sharp, widespread decline in home values similar to the last housing bust in 2008-09. A bubble, by definition, would have to burst.

Experts say the strong regional economy should sustain a healthy residential market in the foreseeable future. Unemployment is at record low levels and average wages are increasing. People continue to move here from across the country, often willing to spend more than the historical Middle Tennessee buyer.

“It’s really hard to think of scenario that exists where there is a bubble in Nashville,” said Nela Richardson, the chief economist for the national real estate company Redfin. “You might see some price elevation that makes it unaffordable to some people locally, but it doesn’t mean those prices are unsustainable."

Nonetheless, the greater Nashville metro area has cooled slightly in 2017 compared to the previous three years.

Houses selling more slowly

One key indicator is the “days on market,” or the number of days a home takes to sell after it was listed. The faster the sales time, the hotter the market. For 39 consecutive months until October 2016, the median days on market in the Nashville metro area dropped compared to the same month a year earlier, according to sales data provided by Redfin. Since then, the number of days has increased in five of the past 13 months, compared to the same months in 2016.

“A lot of people got used to that rate of growth and now that it’s more normal, people have more fear,” said Robby Stone, an agent with Village Real Estate. “That’s not something we should be scared of. Buyers should be able to take their time.”

Stone's company has been trying to sell a new house in East Nashville for more than a year, a pace he admits "sounds terrible." His client, Aerial Development Group, tore down a tiny $165,000 house in Shelby Hills and built a four-bedroom navy blue house will all the latest design trends. Village Real Estate listed it for $649,000. The house hasn’t moved.

After dropping the price to $639,000 with little effect, he got creative. Stone produced a music video — a parody of the song "Part of Your World" from Disney's "The Little Mermaid” where the lead singer plays the character Ariel. Now the home is listed at $599,900, and Stone continues to show it on Sunday afternoons.

“I have people ask me every week if that house has sold,” he said. “I can’t wait for the day that I can say ‘yes.’”

'One big beautiful melting pot'

Part of the difficulty, Stone says, is that buyers from outside of Nashville expect a neighborhood with some uniformity. But that section of East Nashville is "a pretty transitional area," he said, with mixed socioeconomics and divergent housing prices.

“Nashville is one big beautiful melting pot," Stone said, "and with that obviously comes some pains.”

That home's zip code, 37206, had third-longest median days on market in September (among zip codes with 50 or more sales in a month). Homes in the greater Nashville metro that sold in September took 50 days to sell, while that zip code took 76 days.

A few other zip codes tell the story:

In the Inglewood zip code of 37216, builders flooded the market with so-called “tall-skinnies.” These are new narrow homes with two or three stories, typically two houses to a lot, in place of older single-story homes. The influx of supply eventually tipped the scale. After 40 months of year-over-year price gains, the zip code’s median sales price dropped during July, August and September. It was down 10 percent in September compared to the peak in August 2016, from $308,000 to $278,000.

“There are some areas where we are getting a little bit ahead where demand is,” said Scott Troxel, president of Greater Nashville Realtors. “We may have a bit of a surplus in some areas.”

But Richardson, the Redfin economist said, “I think it’s tempting to attribute a decline [in prices] to a bubble. It’s very unlikely that trend would hold."

In 37215, the zip code that includes the high-end suburbs of Green Hills and Belle Meade, the number of homes sold has dropped during 14 of the last 15 months, compared to the same time frame in the previous year. The preceding 15 months had the opposite trend, with climbing sales.

“You may see weakness at the top end,” Richardson said. “There’s less demand for those homes. And as home prices grow they are the most vulnerable for a price correction.”

In 37203, which includes The Gulch, Wedgewood Houston and portions of Edgehill, the median number of "days on market" peaked this spring at 104, double the average for the greater Nashville metro area. It dropped to 74 days in September, still the third-slowest zip code in the region. Developers have been tearing down older homes there, particularly just south of downtown, and building drastically more expensive, larger homes.

“Some people say it’s ‘location, location, location,’” said John Brittle, a broker who has bought and sold properties south of downtown. “It’s really not. It’s ‘timing, timing, timing.’”

In more affordable areas outside the urban core, prices are still climbing at a breakneck pace. In the 37214 zip code, which includes Donelson, the median price climbed 24 percent from $182,000 to $225,000 over the 12 months ending in September. The days on market has been dropping or holding steady.

“Those areas will continue to grow after some of this other stuff slows down,” said Keller Williams agent Josh Anderson. He still sees multiple offers on homes in areas like Antioch and Hermitage.

Solid economy, rigid lending standards

Demand for affordable homes is still strong — especially under $300,000 — and the supply is constrained, experts say. A quarter of homeowners are cost burdened, meaning they pay more than 30 percent of their income for housing, according to a recent Metro government report.

People tend to conflate the concepts of affordability and sustainability, said Richardson, the economist. "It can be really expensive, and the middle class can be priced out, and there could still be no bubble.”

A leading indicator of a bursting bubble, said Richardson, would be an unhealthy lending market — high loan default rates and more subprime lending. But lending standards are much tighter than the mid-2000s. Nashville mortgage delinquencies have decreased since 2016, according to data compiled by Corelogic, a national real estate company. Also, a smaller proportion of homes in Nashville are “underwater,” where the amount owed on their mortgages exceeded the value of the home.

One solution to the affordability crunch may be additional building, Richardson said. Throughout the U.S., she expects new construction could help relieve some of the pressure.

Indeed, home builders are on track to obtain nearly five percent more permits this year compared to last in the greater Nashville metro area, according to a recent report by Metrostudy, a national research company.

Edsel Charles, a market researcher with Franklin-based MarketGraphics, projects a steady market for new homes until May 2020, when prices could level off and the number of sales could decline until 2023. Charles said he predicted the 2009 downturn years before it happened.

“We think it’s going to be a shallow downturn and there are going to be some parts of the market where it’s hardly noticeable,” Charles said.

Nashville's underlying market health is based on solid demand and economic fundamentals. The unemployment rate in September was 2.3 percent, the lowest since at least 1990, according to the Bureau of Labor Statistics. And the average household income, Metrostudy projected, could see a greater than 3 percent increase over the course of 2017.

“I anticipate that going into 2018 we’re going to see a very strong year," said Troxel, the Realtor association president. He does expect “a slight cooling,” but “I don’t think you’ll see long-term trends where you’ll see values go down.”