By the time Nobel Prize-winning economist Robert Shiller announced his tepid real estate forecast in October, a downturn in the U.S. housing market was well underway.

Mortgage rates were reaching heights not seen in more than seven years. Home-price appreciation was lurching after record-breaking growth. Builder and consumer confidence were tumbling as fewer shoppers snatched up homes, even as builders threw in incentives such as free cabinets and Louis Vuitton handbags.

“This is a sign of weakness that we’re starting to see,” Shiller, the famed housing economist, told Yahoo! Finance on Oct. 30 after his namesake S&P Case-Shiller Index reported that U.S. housing prices continued to cool. “And it reminds me of 2006 … a couple of years before the financial crisis, [when] home prices were starting to weaken a bit.”

Perhaps Shiller should have added “except in Philadelphia.”

As the national housing market was largely sputtering last fall, Philadelphia and some of its suburbs were still enjoying the real estate renaissance that has swept across much of the nation since 2012. While U.S. single-family home sales tumbled to a nearly 2½-year low in October, Philadelphia hit a record for homes sold during the fourth quarter. And while home values fell in some of the country’s hottest cities, including Las Vegas and Seattle, Philadelphia’s values climbed 4.2 percent between October and December compared with the year before.

The Philadelphia area’s fourth-quarter housing strength is a surprising shift for a region that only months ago had seen buyers retreating from the market. During the summer, the region’s Realtors described a new category of “wait-and-see buyers,” who were tired of searching, exhausted from bidding, and hesitant to go all-in on a house.

Lately, however, buyers seem willing to dive into the market again.

Interviews in February with nearly a dozen real estate agents, home shoppers, sellers, and economists, as well as an analysis of data provided by Houwzer’s senior economic adviser Kevin Gillen, revealed that significant demand for home ownership still exists in the Philadelphia region. Real estate agents report that buyers are engaging in bidding wars — and are still waiving important contingencies, such as inspections — to secure properties they want. Sellers are seeing their homes fly off the market. And the number of days that houses in Southeastern Pennsylvania stay on the market dropped to just 25 in December, according to the real estate website Redfin, a nine-year low that is about half of the U.S. average.

Meanwhile, inventory of single-family homes — meaning the supply of properties on the market — is lingering at record lows.

Low Supply in the Housing Market

A healthy housing market would have five to seven months of inventory, meaning that it would take that amount of time to sell all properties for sale if no new properties entered the market. Currently, the Philadelphia and suburban markets both have only 3.4 months of inventory, a level that is firmly in sellers market territory.

9 months of inventory

Months of inventory in housing markets

8

Buyers market

7

Healthy market

(5 to 7 months of inventory)

U.S.

6.0

6

5.7

5

5.3

Sellers market

Phila. suburbs

4

3.4

Philadelphia

3

2

1

2017

2018

0

J

F

M

A

M

J

J

A

S

O

N

D

J

F

M

A

M

J

J

A

S

O

N

D

Months of inventory in housing markets

9 months of inventory

8

Buyers market

7

Healthy market

(5 to 7 months

of inventory)

U.S.

6

6.0

5.7

5

Sellers market

Phila.

suburbs

5.3

4

3.4

3

Philadelphia

2

1

2017

2018

0

J

F

M

A

M

J

J

A

S

O

N

D

J

F

M

A

M

J

J

A

S

O

N

D

SOURCE: Kevin Gillen, Houwzer's Senior Economic Advisor
Staff Graphic

"I’ve never seen offers come in this fast, this strong, all on top of one another,” said Karen Cruickshank, a Wayne-based Realtor at Berkshire Hathaway HomeServices Fox & Roach. “There are people who want to buy, and we just don’t have the inventory for them.”

For most of the region, that means sellers have a significant upper hand. The housing landscape is considered balanced and healthy when five to seven months of inventory exists, meaning it would take that long for all homes on the market to sell if no new ones were introduced.

In December, Philadelphia had 4,235 single-family homes and condos for sale — or 3.4 months of inventory, according to Houwzer data provided by Gillen. Delaware County had the lowest inventory in the eight-country region, with only 1,255 units for sale, or 2.6 months of inventory. Chester County recorded the highest in December, with 5.2 months of supply.

In comparison, the national supply was seven months in October and six months in November. December data were not available.

The region’s low housing supply — while a boon to many sellers who have had their pick of competitive offers — threatens to exacerbate affordability problems that plague the Philadelphia area and nation. High demand and bidding wars can artificially drive up prices, keeping low- and middle-class home shoppers, as well as first-time buyers, out of the market.

For shoppers like Andrew Walsh, 32, who began house-hunting with his girlfriend in August, that meant arriving at open houses only to discover that the house was dark and off the market just days after it was listed.

“There were probably three or four houses [that we were interested in] that were scooped up," said Walsh, who rented in Fishtown for nine years before deciding to buy.

“We’d think about putting in an offer before we even got serious about it," Walsh continued. “We would check once a day every day to make sure [a house] was still there.”

Andrew Walsh purchased this home in Port Richmond earlier this month after shopping around since August. He encountered a fierce market, with homes he was interested in slipping out of reach before he could even tour them.
Courtesy Florian Furxhiu
Andrew Walsh purchased this home in Port Richmond earlier this month after shopping around since August. He encountered a fierce market, with homes he was interested in slipping out of reach before he could even tour them.

Despite temptations to fight for homes and overbid, Walsh said, he and his girlfriend were patient. After five months of searching and touring 15 to 20 houses, Walsh settled this month on a home in Philadelphia’s Port Richmond neighborhood for nearly $300,000.

‘They will sell without question’

Real estate agents typically consider the period between Thanksgiving and Super Bowl Sunday the slowest time of the year. Days are shorter, weather gets colder, and holidays take up free time.

This year, however, has been different.

“Traditionally people start coming out of hibernation in March, but I’ve had buyers who have just been looking nonstop,” said Dylan Ostrow, an agent for Berkshire Hathaway HomeServices Fox & Roach in Center City. “With inventory that low, they know that it’s going to be much more competitive come that initial spring boom.”

“From late fall through now, I’ve had three listings go up, and they have all gone under contract within a week,” Ostrow said. “If homes are priced correctly, they will sell without question."

And the phenomenon is not limited to Philadelphia.

When AnnaMarie Jones and her husband, Chris, decided to sell their 3,300-square-foot home in Wayne, Delaware County, in mid-October, they didn’t expect things to move quite so quickly. AnnaMarie had been watching the market and knew there was little supply of suburban homes in good school districts listed in the $900,000 range. But she was pleasantly surprised when their four-bedroom house received three offers — some over asking price — in just seven days.

The dining area and kitchen in AnnaMarie and Chris Jones' new house in Wayne. Their previous house went under agreement within a week, with multiple buyers submitting bids. The Philadelphia region is seeing housing inventory levels that are half of the national average.
CHARLES FOX / Staff Photographer
The dining area and kitchen in AnnaMarie and Chris Jones' new house in Wayne. Their previous house went under agreement within a week, with multiple buyers submitting bids. The Philadelphia region is seeing housing inventory levels that are half of the national average.

“We had a guy reaching out until the day before settlement, letting us know that he wishes he had bought the home" and would be willing to pay more if anything fell through, said Haven Duddy, a Berkshire Hathaway HomeServices Fox & Roach real estate agent on the Main Line, who represented the Joneses in the sale.

In the end, the original bidder’s offer went through, with the Joneses receiving above their asking price. They settled on a new home in Wayne in December.

Uncertain mortgage rates, more investors

There is no one reason why the Philadelphia region’s housing market is still seeing fierce demand while other U.S. metro areas are languishing — especially after so many observers predicted last summer that the Philadelphia market would slow down.

But for AnnaMarie Jones, the decision to enter the housing market was easy: Her family wanted more space. And, she said, if they waited too long to buy a new home, they feared it might become too expensive.

“We knew interest rates were going up, so we knew it was probably the right time to make this decision," Jones said.

From left to right, Genni the dog, Luca, Lorelei, and Kieran Jones in the living room of their Wayne house. With a busy family, the Joneses decided they needed more space this year. They decided to buy in December, fearing that interest rates could climb higher.
CHARLES FOX / Staff Photographer
From left to right, Genni the dog, Luca, Lorelei, and Kieran Jones in the living room of their Wayne house. With a busy family, the Joneses decided they needed more space this year. They decided to buy in December, fearing that interest rates could climb higher.

Mortgage rates can be hard to predict, often fluctuating week by week. Wide swings in rates can affect buyer and seller behavior — even in opposite ways — as residents try to calculate how the changes will affect their monthly bills. A 1 percent increase in 30-year fixed mortgage rates can add $100 per month — or far more — to a monthly payment, depending on the size of the loan amount.

Quita Syhapanya, the Northeast regional director for Metrostudy, a housing research company, said rising rates could make some homeowners want to stay put.

“A lot of folks who refinanced over the last few years are not looking to leave their 3 percent rates and pop into 4.6 percent mortgage rate,” Syhapanya said. “That’s kept a lot of the supply low.”

But the reason inventory has remained sparse is more complicated than that, both Syhapanya and Gillen, the Philadelphia economist, said. A continually rising number of regional investors who have purchased properties, including foreclosed homes, and converted them into rentals or flipped them has further limited the supply of houses available for purchase. By Syhapanya’s estimate, roughly 31 percent of the metro area is currently owned by investors. (Syhapanya defines the metro market to include Bucks, Chester, Delaware, Montgomery, and Philadelphia Counties; an investor is anyone who owns but does not occupy a home.)

“It’s why a lot of first-time buyers and millennials … are locked out of the market,” Syhapanya said.

Gillen said sluggish home-building also contributes to the region’s low inventory. The Philadelphia metropolitan area has produced only 80,000 new housing units since 2012, his data show. Compared with metro areas such as Phoenix and Houston, which have built 154,000 and 339,000 units, respectively, during the same time, the Philadelphia region has not been able to create enough new supply to keep up with demand, he said.

“Our level of new home building has been concentrated in specific neighborhoods and townships, but it has also been quite modest when compared to many other metro areas,” Gillen said in an email.

“We are currently in an unusual disequilibrium,” he continued. “Supply, demand, and prices have become misaligned with each other. This cannot continue indefinitely, and it most certainly won’t.”

What still remains unknown, he said, is when that may be.