Jacob Sagi, Professor of Finance & Wood Center in Real Estate Distinguished Scholar, Kenan-Flagler Business School, University of North Carolina at Chapel Hill

Jacob Sagi, professor of finance and Wood Center in Real Estate Distinguished Scholar at Kenan-Flagler Business School, spoke with Invest: about the Triangle’s housing market, affordability, transparency, and the indicators shaping what comes next. “The market is starting to converge toward what people call being balanced in terms of the seller propensity to list their homes and buyer demand,” Sagi said.

What changes over the past year have most shaped the Triangle’s housing market?

We have seen a tapering off of the hot market that started immediately post-COVID. Market pricing is starting to settle, new listings are accumulating, days on market are increasing, and home affordability is ticking up. In other words, the brakes are being tapped on the market.

It varies by segment, but the market is starting to converge toward balance in terms of seller propensity to list their homes and buyer demand.

Two main factors have influenced that shift. We have seen a lot of incoming supply since about 2022, while demand has been lower because of high interest rates and mortgage rates.

When interest rates started rising, there were not many homes coming onto the market because so many homeowners were locked into low mortgage rates they had obtained in 2021 or earlier. This limited the inventory and is one reason pricing was not really slowing, and affordability was not coming into view.

Now we are seeing more homeowners who had been reluctant to sell become willing to put their properties on the market. Mortgage rates are probably going to stay around these levels, and people eventually will have to move in response to life circumstances. With more homes coming into the market, newly built supply and softening demand mean convergence toward balance. 

Where is the most affordable new housing supply being built?

There are hundreds of new communities under construction throughout the Greater Triangle area. However, much of the affordability is on the periphery rather than in the center.

The most affordable new supply is coming into outer areas such as Johnston County and Harnett County. Anything in what we might call the “definitely affordable” range, around the low $300,000s, is likely to be 30 to 40 minutes or even farther from Research Triangle Park, Durham, Chapel Hill, or downtown Raleigh.

We are also seeing the number of building permits start to slow somewhat. Part of that has to do with the high cost of capital. Builders face higher interest rates when they borrow money to build before they can actually sell.

Economic uncertainty is also working its way into the market, although it is difficult to say that it is the primary driver of the slowdown in new building permits. Builders are anticipating higher costs as well as less demand because of higher mortgage rates and inflation.

Is residential real estate especially vulnerable to economic uncertainty?

It is not clear that residential real estate is necessarily more vulnerable than other assets. When we see big dislocations, meaning large and relatively sudden movements in real estate markets, they tend to coincide with the overall business cycle.

Other assets can move in the same direction. During the global financial crisis, for example, assets across markets were declining. Some of those shocks emanated from residential real estate in the United States, but they spilled over into financial markets, and financial markets are connected globally.

The stock market can react much more quickly than housing or commercial real estate. We saw that during COVID, when the stock market reacted rapidly to the shock.

Real estate adjusts much more slowly, primarily because it takes a long time to transact. In response to a major market shift, sellers may also withhold their properties rather than list them when they believe prices are dislocated.

That means we do not necessarily see the response to major shocks immediately in real estate markets. It does not mean real estate is not vulnerable, though.

How can the timing of a home purchase affect household wealth?

Timing can substantially influence how household wealth grows. It can contribute to what might be described as a fork, or K-shape, in the wealth profiles of U.S. households.

The global financial crisis provides an example. Homeowners who were able to hold on through the significant decline in home prices, the recession, and potential job losses ultimately benefited when housing came back, particularly as prices rose strongly in subsequent years.

Households that could not ride out that period potentially lost both their homes and substantial wealth. Many were also unable to get back into the market and rebuild some of that wealth.

The timing of when households enter the housing market can therefore influence broader gaps in wealth between wealthier and less wealthy households.

What role does better housing data play in improving the market?

What we know from more liquid markets is that increased transparency generally improves how markets function. Transparency essentially means having more information about an asset and reducing situations where one participant has substantially more information than another.

If I am a buyer and you are a seller, but I have much less information about your house than you do, that can prevent a transaction. If we are suspicious of each other’s motives, we may not agree on value. The less transparency there is, the harder it becomes for buyers and sellers to get matched and agree on pricing. In more liquid markets, increased transparency tends to produce more efficient transactions and can also lead to higher prices.

Buyers can find the homes they want more easily because they have more information, but importantly, they can also bid with greater confidence. That confidence is associated with a willingness to offer higher prices. For sellers, greater transparency and liquidity make it easier to estimate listing prices with confidence and transact in a shorter period of time. More information and better data can make all those things possible.

Which market signals will be most important for the Triangle going forward?

The cost of capital will remain important. Interest rates determine what it costs people to raise capital and whether they can afford to buy homes.

Jobs and wages are also important because personal circumstances often drive decisions to buy. If we know where job growth and wage growth are going, we have a better idea of where the housing market is going.

On the supply side, construction costs will remain important. If it becomes too expensive to create new supply while demand is strong in certain market segments, that can put upward pressure on prices.

Building permits are another useful indicator because they show whether builders anticipate being able to sell at a price that compensates them for the risks they undertake, which include higher construction costs and rising interest rates.

What additional data would make housing markets more transparent?

I would like to know much more about the bidding process. We have a lot of information about the price at which a house ultimately transacts, and we may know which real estate agents represented the buyer and seller, but we know relatively little about how many bids were made or how competitive those bids were.

That information would tell us much more about price discovery, meaning how we ultimately arrive at the prices that are transacted.

I would also like to understand how those outcomes vary with realtor representation, including whether there is a buyer or seller realtor on one or both sides. 

Real estate markets, like other markets where transactions happen slowly, have intermediaries. Similar arrangements exist when people buy yachts, airplanes, rare coins, and other specialized assets. Those markets often use brokers. Unfortunately, this type of real estate market data is not currently available to researchers. More detailed bidding data could help us better understand the value agents bring, how prices form, and perhaps give us more insight into where prices are going by shedding light on how buyers make bidding decisions.