After a roller coaster year like the one we’ve just been through, our readers continue to ask what’s going to happen in real estate next year. The reason you ask an economist is because they are right all the time…right? The first thing you learn in economics class is that economists are right 50% of the time. The main reason economists are here is to make weathermen look good!
This is a glimpse at what the real estate market in Texas might hold in 2015. Let’s start with a recap of last year. Anyone who bought or sold a home in 2013 can tell you that it was a great year if you were a seller, and a challenging year if you were a buyer due to the strength of demand for real estate. If we were pressed to describe the market in 2013, we would say that it was great sales wise regionally, but was an ‘outlier ‘year, a perfect storm of great demand and little inventory.
Looking ahead, there are a couple of wild cards out there nationally that could make the real estate market in 2015 look very different. If the job market continues to improve nationally, which is a big if with the last employment report, we will see immediate improvement in the residential market as well as investment real estate in all Texas metros. As we have said apartment and single family rental occupancy continues to tighten, and in the metros continues to be tight even with much new product on the market. So that’s good news for sellers.
All five Texas metros are among the strongest landlord markets in the nation with rental occupancy in the 90% to 95%+ range. Demand in 2014 has kept up with new inventory allowing landlords to raise rents with little to no concessions. Speculative money for building and development is more prevalent this year, which historically leads to overbuilding fairly quickly. There appears to have been a ‘tipping point’ in the last 180 days for multi-family construction. What does that mean? Reduction in rent escalations as evidenced by concessions.
If you are looking for your first home, or more investment property, you have been spoiled by depressed mortgage and lending rates for an extended amount of time. Think about this, if you are under 40 you have never seen rates over 9% before. The average over the last century is 8.8%. When will rates rise? History will refer to the summer of 2014 as a “summer of stability” for mortgage rates which was an unexpected pleasure for mortgage seekers. A near steady decline from the beginning of 2014 through mid-May brought mortgage rates down by almost a half-percentage point, and they have remained there ever since.
Current rates aren’t in a good position to drive demand. Rates aren’t low enough to stoke refinancing business nor low enough as to cause a rush to buy homes. Without outsized demand for homes, and with inventory levels higher, gains in home prices have cooled, which is arguably healthier for the housing market in the long run. If you are still hoping for rates to drop, I would advise against it and lock home and lending values in now.
This period of stability has been promoted by a range of opposing forces – the improving economy and Fed pulling upward to a degree, and the worries of a troubled world economy pulling downward. That said, all good things must eventually come to an end, and these periods of tranquility have historically been known to end more-or-less abruptly. We saw this in fairly recent episodes, in a four-month period ending January 2013 (a flat period for rates gave way to about a quarter-percentage point lift in the ensuing weeks) and more so when the Fed made rumblings about the end of quantitative easing in May 2013 (rates rose by a full percentage point in fairly short order).
Should we be concerned about rising rates slowing real estate sales? Historically when rates increase, all channels of real estate slow for a couple of months as the market holds its collective breath hoping for rates to slide down again. Then when the realization kicks in that rates won’t fall again, purchases pick up dramatically. So rates rising long term could be a good thing.
Should we want or expect a government incentive similar to 2010’sfirst-time homebuyer tax credit? If the government comes in with some great incentives, as they did in 2010, first time homebuyers will get a jump up in the real estate market. But ultimately, they took buyers from the future and sold/closed them early. The after effect of the tax credit was like any other type of artificial stimulant. Great high while it lasted, but with an uncomfortable comedown. I think most would rather not see the incentive again, nationally as well as locally. “Organic growth” is what is needed on all fronts. Steady, organic growth is what keeps a market healthy.
The health of the real estate market is at least somewhat in the hands of the media. The more that is written about how hard it is to qualify for the housing market is, the more renters sit back and do nothing. For those that are concerned they don’t qualify, they need to find out if they do or not, and what they need to do to qualify. In doing nothing consumers have missed some of the best buying opportunities that they will see in their lifetime. And looking back they will have lost buying power and the ability to build equity. Barring a catastrophic event, buyers will never see a more affordable time to buy a home, nationally or locally. As the great investors point out, when everyone else is leaving the market is the best time to get in. And every time rates creep up just one point, you lose 12% buying power on a mortgage.
Advice for buyers
Our advice for a buyer who is planning to purchase a home this year or next: there will not be a better time to buy. Sit down and do the math, values aren’t slowing, neither are rents. Why would you wait?
First thing, get with a mortgage professional and get your financial affairs in order (with the dramatic changes in qualifications, it is not harder necessarily, just more information is needed). Rates are not going back down – if the economy continues to improve, then there will be more demand for credit, and rates will increase.
Should buyers expect discounts? If you read the national media, you realize that those have disappeared. So no, values have been stable in Texas and have been positive as an overall market.
What about foreclosures? Should buyers worry about them? Telling you not to worry is not going to stop you. But if you do your homework, you will see that in established neighborhoods/communities, foreclosures have not had that big of an effect on values like we have read about in other markets. Texas metros are among the healthiest in the US. Yes, we will continue to have foreclosures even in a good market. But they are such a small portion of the market that they have little to no impact on values in the region.
Now is a particularly good time to buy since interest rates are so low. Seven years ago rates were up at 8 percent, now they are down at 4.2 percent. That is a phenomenal savings and people don’t realize it (ask a loan officer about the 12% rule on interest rates). Unfortunately, many buyers will miss this opportunity. Historically, what happens in the real estate business is that people are more comfortable buying when everyone else out there is buying and overbidding on property. For some reason, most folks feel like they are making a smart decision if they are moving along with the herd.
Advice for Sellers
Sellers should be thinking about pricing their home for exactly what it’s worth. Buyers have many more analytical tools at their disposal than they did a few years back. The strategy of pricing a home high because you want to is not a good strategy. Yes, location and schools are important, but in today’s market, particularly at the luxury end, we see buyers passing on older homes due to obsolescence. What does that mean? Just because a newer home sold for a certain amount per sq. ft. does not mean the 50 year old house with same square footage should be priced the same. If you are not seeing multiple offers below your asking price in the first 30 to 60 days, you have overpriced the market and in all likelihood those buyers have gone to build or buy something else.
The market and the media have educated buyers that the opportunities are in the homes that are priced appropriately. If you need to sell, you should price it right against your minimum, so people are willing to look and bid. It is and will be a seller’s market due to the heightened demand and lack of inventory. If you wait, market values will continue to strengthen and not slow for a number of years.
Second piece of advice for sellers is to realize that they are in competition with their neighbors. Your neighbors next door are competing with you to sell their house, so you had better make sure that yours is prettier than theirs. Be aware that your favorite “old” recliner should be put out to pasture also. Buyers judge the condition of the home by how it is decorated and kept up – that includes everything.
Make the inexpensive improvements that buy you some ‘fashion sense’. Personally, I have found that not everyone likes a den done in burnt orange or A&M maroon. If you moved out, you could consider staging your home and renting furniture. You do the little things that people notice – whatever you need to do to make your house compete best with the neighbors that are selling their homes.
So is this new normal? First, 2005 – 2009 was not a ‘normal’ market. 2012-13 were not normal markets. Move past it. There are two constants in real estate: values will trend upwards overtime, but there are rises and dips in that journey. It isn’t a steady increase always. Some would-be sellers have been sitting on the sidelines, waiting for home prices to return to their ‘normal’ values. Comparing to historical values is questionable in real estate. What you need to educate yourself on is how has the community done over time. There will be some exceptional years such as the last few. Don’t just focus on the good, look at the average over a longer period of time.
We know it is against your nature, but don’t look for your appreciation on a yearly basis. No one buys and sells a home in just one year. Besides, in Texas, history teaches you that you are not going to recover your value plus costs in one year! The good news is that you shouldn’t be surprised if prices continue to improve and then plateau in a couple of years, and then push even higher. Real estate markets can recover much faster than they can fall. If you look at history, it has happened time and time again. It requires patience and timing.
No one knows for certain what the future holds. Even data can be misleading. The best move for buyers and sellers alike is to carefully consider your own unique situation, do your homework, and seek out advice from trusted sources to help ensure you are protecting your long-term financial success with any of the moves you plan to make.