MarketGraphics’ Edsel Charles on the Nashville Housing Market

Southern Land Company’s stellar employees provide the company with a wealth of expertise internally, but we also partner with a number of excellent professional experts to support our work.

One of those is MarketGraphics Research Group, a Franklin, Tenn.-based firm that monitors interesting trends in the new home industry. The firm provides research critical to planning and investment for developers, builders, banks, governments and other parties.

MarketGraphics was founded in 1988 by Edsel Charles, who built more than $100 million in new single-family homes in the 1970s and 80s. Given his singular insight, we asked Mr. Charles for his take on the red-hot housing market in Nashville. Click here to see a chart that depicts Nashville’s housing growth in the past, present and future.

Insights: The Nashville region is one of the nation’s fastest growing, and housing is booming. What’s going on, and will the torrid pace continue?

Edsel Charles: The Nashville housing market has been so heated that over a four-year period, through 2015, there was a 100 percent increase in new home permits. As a result of what’s occurring, Freddie Mac has designated Nashville as the number one housing market in the United States. Some people think the greater Nashville housing market is starting to soften, but it’s actually catching its breath. Builders need this break because some of them are at their maximum financial capacity and cannot borrow any more money. Additionally, there are not enough developed lots to sustain the same level of continued rapid growth.

We need this break because lot inventory is down, there is a shortage of labor and everything is jumping in price. As an example, in the last couple of years, framing prices have risen by $2 per-foot. The greater Nashville market (minus Montgomery, which is not included because of military personnel moving on and off the base frequently) is returning to a quality pace of a first-class growing housing market. This translates into fewer starts and sales than we have had in the recent past. However, this new pace would be welcomed by just about any other region. The developers will still be knocking it out of the park, but this pace reduction will give them a chance to catch their breath as well. We forecast a need for an additional 88,000 lots in the Nashville 11-counties by the end of 2021 just to keep up with the demand.

I: Why is all of this demand occurring?

EC: There are three main drivers. First, pent-up demand. Second is the restructure of the downtown market for residential life and a desire by people to relocate there who would not have otherwise moved from their homes. And, third, new population growth to Middle Tennessee from other cities.

I: Rental apartments are popping up everywhere around the region. How do you explain the rental boom?

EC: There are several driving factors for rental market expansion. First, we are witnessing a shift in thinking with the younger generation. Millennials tend to want to avoid 30-year mortgages. They would rather pay rent and have the freedom to travel or sit by the pool and let someone else cut the grass and take care of other home maintenance items. We forecast that this generation will wait an additional five- to-six years beyond the average age of home ownership before they recognize the benefits they had been missing. Other reasons for the rental surge include the massive amount of student debt young people are carrying. About 12 percent of mortgage deals involving millennials fall apart because they have too much debt. As a result, they become renters. And the other main reason lingers from the last recession. So many people bought homes they could not afford and are having a hard time restoring their bad credit.

I: Let’s talk about home prices, which have been rising higher and higher. What’s happening?

EC: In the Nashville area, while the price is increasing, we are starting to see a little relief in the increased home prices. A home in the $300,000 range between 2014-15 had an average increase of about $1,000 a month in value. Today we see the increase at about $500-$600 a month. It’s a decrease in escalation, but increasing overall. That value increase will continue for at least the next three to four years. On a $500,000 home, I can see it going up about $800-$900 a month in value.

I: What’s your forecast on the national economy?

EC: Our forecast anticipates that the next downturn will be in May 2020. It will be such a modest downturn that I don’t even know if the word “recession” will apply all over. Our forecast is that the bottom of that next recession will be about equal to today’s economy and will reach a bottom in about two and a half years at a rate of 5 percent a year. We see it bouncing back quickly. We don’t see another downturn beyond that until 2028.