You’re Killing Me, Sales!

By Cassandra Majors

Whether or not you were the right age to see the cult classic coming-of-age movie The Sandlot, you’ve probably had this iconic line thrown at you whenever an 80s or 90s kid is annoyed with you: “You’re killing me, Smalls!” The most important plot-driver in the film is a lack of baseballs. Baseballs are the most precious resource to the ragtag sandlot team, and once they’re gone and the team can’t play, there’s nothing to do but hunt for more.

The Sandlot has been on my mind lately because I’ve had a similar exclamation on my mind, as I’m sure many of you have, too: “You’re killing me, sales!” We’ve all noticed that the market is slowing, but is it just a blip on the radar, or a concerning trend? Though I can’t see into the future, there are some reasons to plan for an adjustment in the market.

Let me be clear: I’m not talking about a bubble bursting or the economy crashing (the U.S. economy is doing well overall by most accounts). Home prices are still appreciating at a very healthy pace, but when housing inventory and affordability are both as low as they’ve been for as long as they’ve been, the number of sales is bound to slow. Take a look at the major Texas metros in these graphs sourced from Texas A&M’s Real Estate Center data: Austin, Dallas, Houston, and San Antonio. You can see the exact same phenomenon in each metro—average and median prices reached all-time highs in 2017 and are still going up, but both sales and sales volume are clearly beginning to flatten or decline. It’s good news for homeowners in that their equity will continue to increase, but could present a challenge for those of us in real estate that benefit from higher numbers of transactions. And this is consistent with what’s happening in the nation: long periods of low inventory are raising home prices and leaving buyers with fewer affordable choices, especially considering that over the last ten years, wages have grown less than half as much as prices have increased. Last week, The Wall Street Journal reported that U.S. homeowners’ mobility rate is at a 30-year low, meaning homeowners are staying in their homes much longer before selling than they used to.

Keep in mind, even where inventory is starting to go up, it’s not necessarily a good sign—Austin’s recent increase in inventory and days-on-market, for example, seem to be symptoms of pricing that is too high for most buyers actively looking for homes. Increasing inventory itself doesn’t help unless more of that inventory is affordable for the average buyer.

Why do I suspect that this is a trend and not a blip? Here’s a non-comprehensive list of all the factors nationwide that may be contributing to the home-sale slowdown:

New Home Building Still Lags Far Behind Demand: A fantastic study by Trulia showed that the greatest contributor to low inventory nationwide is that there simply aren’t enough new homes being built. Homebuilding stagnated during the Great Recession for obvious reasons, and as much as it has picked up since the recovery, it’s very difficult to make up for that much lost time. And as any developer can tell you, it’s much more difficult than it used to be to garner loans for large-scale developments, further slowing down new housing starts.

Investors Now Command a Much Larger Chunk of Housing, and They’re Not Selling: The mortgage crisis and recession meant that many homes had to be put up for sale or foreclosed, creating an ideal opportunity for investors to grab up inventory. Though some flipped the properties, many more kept them to create rental income. Almost one in four single-family homes are now owned by investors, and as demand for rental housing skyrockets all over the country, the investors have every incentive to hang onto their assets.

Fewer Millennials Are Able to Afford Homes: Millennials are becoming the largest age group in the real estate market, but they face many obstacles in saving to buy their first homes, including stagnant wages, much higher college debt than past generations, and rising rents. Many spend such a high percentage of their incomes on rental housing that they find it difficult to save for a down payment to buy a house. Millennial demographics also affect their home-buying decisions, as many more young adults are waiting later to get married and have children, which are typical motivators to buy a home. And in growing urban regions of Texas, rapidly increasing property taxes definitely aren’t helping those struggling to afford monthly payments.

Negative Equity is Declining, But Still a Major Problem for Many: Don’t forget that the shadow of the Great Recession still looms over millions of homeowners even a decade later. Nearly one in five homeowners still have less than 20% equity in their homes, so even if they wanted to move, after factoring in down payments, closings costs, and moving costs, they would end up breaking even or paying more for the same amount of equity. But at least there’s good news here for our state as Texas has the highest percentage of positive equity in the country.

Past Low-Interest Rates and Currently Rising Interest Rates Are Both Limiting Buyers: Though interest rates have risen slowly and only recently at that, they are rising and will continue to do so. This means even as potential first-time homebuyers try to save for a down payment and home costs, interest rates will keep moving the goal post farther down the field as they decrease buying power. For every 1% interest rate increase, a buyer’s purchasing power decreases by 9-11%. But then consider the other side for current homeowners who bought in the last decade—interest rates have been historically low for so long that everyone who bought at a low rate will also be deterred from buying a new home with a new mortgage that will cost them significantly more in interest. The more interest rates go up, the harder it might become for those who bought at low rates to justify trading up to another home and sacrificing equity in the process.

Low Inventory Becomes a Self-Fulfilling Prophecy: One of the hazards of low housing inventory is how it eventually begins to reinforce itself. If I bought a starter home years ago with plans to upgrade in the future and I now have the means to do so, I’m suddenly too fearful that I won’t be able to find another house and just decide to stay put. This isn’t just a theory for me personally—I actually own a small condo that I bought at a good price and thought I’d eventually upgrade and put my condo on the market, but now after seeing what’s (not) available on the market, I’ll be sitting tight for the foreseeable future. I’ve become one of my own statistics! The gap between a starter home price and an upgrade home is widening all the time, which sinks turnover rates.

Far Fewer Workers Are Moving for Work: Many more homes used to change hands as workers migrated to other cities and states to take a new position or at least land in a better job market. Marketplace offers an excellent analysis you should read of what might explain this, so I won’t repeat all of their conclusions here, but some of the causes may include:

  • Job switching overall is in decline (not just for jobs that require a move).
  • More families have both spouses and/or parents working than they did in the past, meaning both must be able to find commensurate jobs in the new place, making the decision to move much more complex.
  • Workers are more worried that jobs aren’t long-term or stable enough to risk moving a household for them.
  • Cities with higher incomes also have increasingly higher costs of living that may negate the benefits of moving there for a better-paying job.

Vacation Rentals Snatch Inventory from the Market: The soaring popularity of vacation rentals from companies like Airbnb, HomeAway, and VRBO are also buckling the knees of an already weakened inventory. The economics are very easy to understand: say I own a three-bedroom house in central Austin that market forces tell me I can rent for $2,500 a month, but then I realize I can rent it out for $250/night on Airbnb. I only need to book ten nights a month to make the same profit, and I can probably book more than that because the house is in a great location in a vibrant, booming city that attracts endless visitors. I have no leases to fuss with, no costs to find good tenants or evict bad ones, and no turnover losses when tenants leave. Why wouldn’t I choose a short-term rental? As these homes disappear from the buying and renting markets, costs for renters and buyers in those neighborhoods can go up. One of the hot topics in the controversial CodeNext zoning plan for Austin is whether the city should make it easier to build Accessory Dwelling Units on existing properties to add inventory and ease affordability by boosting housing density. But what if more of these ADUs are built and most owners simply rent them out on Airbnb instead of adding them to the available housing stock? Especially for a smaller building like an ADU, I doubt the economics would favor long-term rentals over vacation rentals.

Seniors Want to “Age in Place”: The U.S. has a growing senior population (Baby Boomers are expected to make up 20% of the total population by 2030) and it looks like they’ll be yelling “Get off my lawn!” at potential home buyers for years to come. A recent survey by Realtor.com found that 85% of Baby Boomers have no plans to sell their homes in the next year. Life expectancies continue to increase, and those with health problems that used to force them into assisted living centers and nursing homes now have many more home-care options that allow them to stay comfortably in their own homes. More elderly Americans than ever before want to stay in their own homes, so many of those homes, that might have entered the market in days past may now stay out of inventory for longer.

So what can we as real estate professionals do? Here are a few positive things to keep in mind:

  •  You’re in the right state! Texas is attracting more and more employers, its metros are exploding in population, and the state is creating more jobs than any other. DFW alone is creating 8,000-12,000 jobs a month, for example. Good jobs for skilled workers will mean an increase in home-buying in the long term. This means even if sales continue to be lower for the foreseeable future, we’re in a better place to weather the decline.
  •  The U.S. economy is doing very well and wages are finally starting to rise after stagnating for many years, which will hopefully increase affordability for many more buyers.
  •  American homebuilders are enthusiastically ramping up for the next few years, and many major cities are starting to realize and address that their zoning laws are hindering desperately needed urban development for large multi-family projects.

Spoiler alert! In the end, The Sandlot team uses all their combined brainpower to defeat the evil Beast (which turns out to be just an old grumpy dog) guarding a treasure trove of baseballs, and they have enough to play for years. There’s no doubt that Texas will triumph in the same way—there may be more competition for a fewer number of sales for a while, but our state’s economy will help us defeat this Beast. In the meantime, my strong recommendation for 2018 is to up your game: be creative in finding buyers and borrowers, make wise pricing decisions for listings, and keep your eye on the ball.

Cassandra Majors has been a market analyst and data guru in the Austin real estate industry for over a decade.

 

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