The Dwindling Supply of Cheap Houses in Nashville, TN

According to Realtracs MLS listing service, there are 2,885 total listings for sale in Nashville, TN, within Davidson County’s borders. I got that number from Red Panda Properties, and I was informed that 616 of those listings are pending. The pending houses already have buyers lined up who have passed the inspection and appraisal periods, and are simply waiting until the closing date. Essentially those properties are already taken. That leaves 2,269 that are active listings, available for purchase. Out of those, only 147 are priced below $100,000, a meager 6.5% of the listings. There are plenty of markets across the country where $100k isn’t considered cheap at all. But in Nashville, that amount can buy only one out of every fifteen houses for sale. In short, there aren’t many options.

Corresponding with the dramatic drop of cheap house inventory, the quality of house that $100k buys has diminished as well. These available properties are typically not in highly desirable locations, and the houses are small and usually in desperate need of major updates, if not entire renovations. Some have moved into the category of being considered more for the land value, where the existing structure is simply torn down in favor of a newly constructed house. The result is that prospective homeowners and investors across Nashville are faced with fewer choices of houses, higher price tags, and a lesser quality product. Welcome to Music City’s real estate market in 2015.

Of the 147 properties for sale under $100k, only 29 are priced below $70k, and only six are available for less than $50k. As mentioned earlier, the vast majority of these homes are not turn key properties. Many need an additional injection of funds to make them livable, let alone comfortable. When factoring in necessary expenses for repairs and improvements, the cost of ownership is raised even higher, resulting in even fewer solid housing options available under $100k. For example, the $90k house that needs $30k of work is now $120k. Regardless of how much of that amount is coming from borrowing funds, there are still deeper pockets required from the buyer to get the house in good enough condition to earn income. For both beginning and experienced investors in Nashville looking to grow their real estate portfolios through rental units or flips, the greatest cash outlays ever are required.

Nashville’s current cheapest house: $40,500, one of only six under $50k

I have a couple of notebooks that I keep information in about potential investment properties. I just flipped through a few pages with my entries of houses for sale in late 2010 and early 2011. There were dozens of properties listed for $40k, $50k, and $70k. At that time of economic uncertainty, some of them were sitting on the market for less than $50 a square foot and could be purchased significantly below the asking price. I was active at that time, doing fix-and-flips and acquiring a couple of single family rental properties, but I wish I would have bought more. Now it almost hurts to look through those cheap houses for sale in my notebook. I would be writing full price offers left and right if they were current listings. In today’s market it is difficult to unearth any decent properties in that price range. My how the times have changed.

The current market conditions are additionally frustrating because there are more investors shopping for deals, with money pouring into the Nashville, TN market from around the country. The increased competition among buyers forces quicker reaction times for buyers. If a property is worth thinking about, you’d better think quickly. Hesitating to pull the trigger means more potential buyers seeing the property, with more offers ensuing.

The process of finding a good deal on an investment property can be trying for patient investors, who sometimes feel that if they don’t buy they will be left behind. Others stand on the sidelines, wondering if a bubble is forming. They are content with the hope that the market will calm down or fall a bit in the near future. Hypothetically, after this market correction, they would be able to purchase properties at a discount again. Some long-time Nashville investors have seen the market ups and downs before, and they trust that they will be buying low again. But Nashville hasn’t experienced this strong, sustained type of growth before. What if there are three more years like 2014? What if the market doesn’t “correct” down, but high housing prices are a new normal. Can investors afford to NOT buy now if the price tags only go up from here?

The lack of cheap houses is additionally affecting the rental market. Because landlords have to pay more for houses, they in turn charge higher rents. But in a strange twist of circular cause and effect, due to many tenants paying higher rents, more people are attracted to real estate investing, where the rental returns on investment can be more appealing compared to the stock market or other alternatives. Most investors are targeting below median price properties for rentals, furthering the demand for the very houses that are already in short supply.

I’ve already written about why I haven’t been buying MLS listings, so I’m not really expecting to find a great deal on the MLS anyway. Looking through the MLS’s small menu of options available for under $100k only reminds me of why I hunt down deals apart from the MLS. But regardless of where the source of the deal comes from, one truth is remarkably clear in Nashville: the cost of getting in the real estate investment game and staying in the game has risen.