The Tennessee real estate market suffered the same setbacks as the rest of the country in the first quarter of 2020. When the Coronavirus was officially declared a pandemic, fear, and uncertainty all but brought the local real estate market to a standstill. Fortunately, the disruption was only temporary, and the new market left over in the wake of COVID-19 looks more than capable of making healthy progress. Now that demand persists in the face of historic appreciation rates, the Tennessee real estate market looks to have its legs underneath it, which bodes well for everyone looking to participate. Investors, in particular, should be able to capitalize on several trends.
The Top Tennessee Real Estate Markets
While the best real estate market in Tennessee is up for debate, here’s a list of the cities investors may want to pay special considerations to:
Unemployment Rate: 5.3% (latest estimate by the Bureau Of Labor Statistics)
Population: 6,770,010 (latest estimate by the U.S. Census Bureau)
Median Household Income: $48,708 (latest estimate by the U.S. Census Bureau)
Percentage Of Vacant Homes: 11.77%
Foreclosure Rate: 1 in every 23,797 (0.4%)
Tennessee Median Home Prices
Much like every other market in the country, the Tennessee real estate market reached its lowest point of the Great Recession around the first quarter of 2012. At that time, one of the greatest recessions in American history dropped the median home value in Tennessee to somewhere in the neighborhood of $127,000. Fortunately, real estate in Tennessee was able to draft off of many positive national indicators for the better part of a decade. For eight consecutive years, local home values benefited from improving sentiment, a strengthening economy, and a lack of available housing options. These factors, and several others, contributed to a 59.9% increase in the state's median home value from January 2012 to January 2021. According to the Zillow Home Value Index, the median home value in Tennessee is now $203,134 after benefiting from several tailwinds.
To put things into perspective, the median home value in the United States bottomed out around $161,000 in the first quarter of 2012. Since then, the median home value across the whole country has increased by 63.5% and is now upwards of $263,351. The difference between the Tennessee real estate market and the national housing market shouldn't reflect poorly on the state's performance but should rather serve as a testament to nationwide trends. Most notably, unemployment across the country has been cut in half, dropping from a peak of 14.7% in April to 6.7%. More people working has allowed the country as a whole to experience a sense of positive regression.
Moving forward, the Tennessee real estate market is expected to continue appreciating at an incredible pace, matching that of the national housing market. In fact, the median home value in the U.S. and Tennessee is expected to increase 10.3% over the next 12 months because of indicators created by the pandemic.
Most notably, prices will continue to rise because of supply and demand constraints. Before the pandemic, there was an inventory shortage in Tennessee, which led to rapid appreciation. Today, homebuilders are still hampered by the impact of COVID-19 and haven't been able to add to inventory levels that desperately need assistance. Despite a lack of available homes, people are still inclined to buy, creating more competition over the few available listings. That competition will drive up prices for the foreseeable future, or at least until builders can ease the supply shortage.
Tennessee Foreclosure Trends & Statistics
The Tennessee real estate market has a low foreclosure rate, at least compared to the national average. Whereas the entire country currently boasts a 0.7% rate of foreclosure (one in every 13,482 properties), Tennessee's 0.4% is much lower than the national average; that translates to one out of every 23,797 homes being in some stage of distress (default, auction or bank-owned).
Tennessee's foreclosure filings are split fairly evenly between auctions and bank-owned properties, 50.8% and 49.2%, respectively. That said, the Tennessee real estate investing community may want to shift their attention away from distressed homeowners and towards banks and institutional lenders. If for nothing else, the largest distributions of distressed homes are currently in possession of lenders and underwriters.
The highest concentrations of distressed properties in Tennessee exist in the following counties:
Henry: (1 in every 1,716)
Lake: (1 in every 2,606)
Cannon: (1 in every 3,054)
Wayne: (1 in every 3,659)
Madison: (1 in every 4,757)
While foreclosures have declined for several years, the Coronavirus will surely cause an influx in the coming months. Foreclosures across the United States have already increased, and there's no reason to think Tennessee will be an exception. It is too soon to tell exactly how many foreclosures to expect in the Tennessee real estate market, but it's safe to say filings will increase sooner rather than later. The financial burden placed on many homeowners by the Coronavirus and rapid increases in unemployment should cause a spike in distressed owners. As a result, well-positioned investors should prepare to step in and help financially-strapped homeowners. Those who line up financing now could simultaneously help homeowners at risk of bankruptcy and secure a deal.
Tax Lien Investing
Tax Lien or Deed: Redemption Deed state
Interest Rate: State holds auction; 10% penalty
Redemption Period: 1 year after sale
Tennessee Real Estate Investing
With eight consecutive years of appreciation in the rearview mirror, local investors have done well for themselves in recent history. Long-term investors, in particular, have likely benefited immensely from growing home values. The equity from homes purchased just a few short years ago has most likely made the majority of investments worthwhile. However, the Tennessee real estate market (much like everywhere else) is getting to a tipping point. Homes have increased in value so much that attractive profit margins are growing harder to come by.
The Tennessee real estate investing community may appreciate profit margins generated from auction homes, but opportunities are not what they once were. Finding deals below market value is getting harder because of years of appreciation. That's not to say Tennessee real estate investors can't continue to flip homes they buy at auction (the absolutely can), but rather that the new housing market created by the pandemic is more suited for long-term investors. In particular, today's most prominent indicators lean heavily in favor of landlords.
To be clear, it has never been cheaper to borrow institutional money to fund the purchase of a home. To stimulate the national housing market, the Fed announced it would keep interest rates low to make buying a home more attractive. As recently as November, the monthly average commitment rate on a 30-year fixed-rate mortgage was 2.77%, according to Freddie Mac. At that rate, borrowing money is more appealing than ever before. The lower interest rates associated with today's purchases will decrease monthly mortgage obligations. Investors who take advantage of today's rates will potentially increase monthly cash flow and profit margins on long-term rental properties.
In addition to low interest rates, it looks like Tennessee's price-to-rent ratio will help long-term investors. At 12.13, the state's price to rent ratio suggests it is more affordable to buy a house than to rent one. More affordable homes would typically work against landlords, as more people are inclined to buy than rent. However, the state's low inventory level means there's not enough supply to meet demand. Even those who want to buy will be forced to rent for the foreseeable future, which bodes well for landlords. The added competition will enable landlords to increase prices while demand is high.
Investors are lucky to have several viable exit strategies at their disposal, but none appear more attractive than building a proper rental property portfolio in the wake of the pandemic. Too many important market indicators are pointing towards becoming a buy-and-hold investor in Tennessee to ignore.
Tennessee Housing Market Predictions
The Tennessee housing market has done very well for itself in the last eight years. For the better part of a decade, in fact, real estate in Tennessee has exhibited many of the same characteristics as its national counterparts. Price increases, confidence in the market, and several other indicators are in line with national trends, but what does that mean moving forward? What can the Tennessee real estate investing community expect moving forward?
Secondary cities will receive more attention: Tennessee has seen demand increase dramatically in recent history. Prices have increased alongside the competition. It is now fair to assume secondary cities like Jackson will start receiving more attention from millennials (the largest population of buyers). Appreciation in Jackson has already started to eclipse Nashville, but first-time buyers still find the secondary city very appealing. Cheaper home values will then drive up competition in Jackson sooner rather than later.
Historic appreciation will continue: Despite the pandemic, real estate in Tennessee remains red hot. As it turns out, pent-up demand was enough to maintain an active housing sector. However, there aren't enough listings to keep up with demand. As a result, sellers will increase asking prices to line up with the competition.
More people will move to suburbs: Cities were too expensive to begin with, and now they are hotbeds for the Coronavirus. Today, people who are permitted to work from home may start moving to suburbs to seek more affordable, roomier living situations.
The Tennessee real estate market entered into 2020 with a lot of momentum. The state's median home value was on the brink of appreciating for an eighth straight year, and demand never even blinked. The unique combination of buyers willing to purchase in an appreciating environment was a good sign for things to come. Even the pandemic couldn't interrupt the momentum real estate in Tennessee had built in previous years. All things considered, Tennessee took one step back and two steps forward in 2020. Moving forward, look for Tennessee to maintain a healthy market for buyers and sellers.
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