Has the Texas Real Estate Market Slowed?

by Mark Sprague

I am frequently asked if the Texas real estate market has slowed. In this piece I’ll explain the state of the market and try to answer this question. First, some context.

Austin real estate has been traveling at light speed with over 60% appreciation on residential real estate in the last ten years. DFW has seen over 50% appreciation in the same period. While these aren’t as robust as the ‘go go’ years of the sand states (California, Arizona, Nevada and Florida who at times pre-recession were appreciating 40%+ annually), they have led the nation in the last ten years. Since 1990, Austin has had an average residential real estate appreciation of 5.4%, Houston 4.9%, San Antonio 4.7%, and DFW 4%.

Recently, we have seen sales slow, as you can see in the charts below. Not much, but a little.

 

Point of distinction: Residential appreciation has slowed, but not declined.

Commercial real estate sales nationally are off about 20% from last year. Here in Texas, it is slower but not by nearly that much. Commercial values continue to be strong in all Texas metros, except Houston due to the oil downturn (pre-Harvey). Pre-Harvey there were concessions on multifamily rentals. Those all but disappeared after Harvey. The other Texas metros continue to see good appreciation and occupancy. Most commercial channels have occupancy above 90%. These are all signs of healthy markets.

 

So the important takeaway is that Texas metros real estate values continue to appreciate. In some price points, inventory is up, particularly luxury above $2 million. Buyers are looking at properties as a commoditable product so they are not willing to overpay. The buyer will see multiple homes, and the one that best fits their needs and budget will be their new home. Sellers are having to travel farther to meet buyers expectations. Luxury is in a ‘buyer’s market’.

Have values increased in this price point as aggressively as the rest of the market? No, luxury values have historically been less than the general market due to the smaller pool of buyers.

If you are shopping for a house with a budget above $2 million? I have good news: You have more than a six-month supply of homes to choose from, as opposed to a couple months’ supply of homes in many of the lower prices.

Below $700,000, if priced correctly, we are still seeing multiple bids in Austin and Dallas. Sales volume has been dropping, but days-on-market has gone down. Overall, the market is clearly slowing down for the season, though it’s not painfully dull like it was in 2013 or 2014 during the fall. This is key to understand because when we say values are “softening,” some interpret that to mean the market is really slow or crashing. But we’re really only saying sales are slowing.

These charts show you which price segments are strongest in our metro areas.

Many price stats last month actually showed an increase in value. What does that mean? Does this mean the market improved? I thought you just told me the market is slowing? In reality, sales from October really tell us more about properties that went under contract in August and September before they actually closed escrow in October. Thus that 1% uptick really happened in the market a couple of months ago rather than in October. In other words, we’ll see the real trend of the market for October when the pendings from October close in November and December.

Let’s not make a big deal about the market technically showing an increase, because the uptick didn’t actually happen last month. If we want to see the current market, we must look at the sales, but we cannot forget to give strong weight to the listings and pendings. Are properties taking longer to sell? Are there more listings hitting the market? Are properties starting to generate less offers or offers at lower prices? What are buyers, sellers, and the real estate community saying about the market? All these are factors to consider.

To borrow an analogy from the holidays, I’d say the real estate market is like searching the freezer and refrigerator for leftovers from the holidays. You cannot expect the food to taste the same or cook at the same rate. It depends on each market. Some portions are blazing hot

while others remain only warm — or even frozen. Like leftovers, we can say the real estate market is hot overall, but it’s definitely not the same temperature in every area or price range.

Lower price points have had the largest appreciation

Some of the largest price increases in the Texas metros these last few years occurred at the lowest price ranges. While values increased by 5+ percent or so for many price points, in some starter areas, values easily increased by five times that amount. So the market is ultra hot at some of the lowest prices in town, but we don’t see the same rate of appreciation at every price point throughout the region. On top of that, this year, properties above $1 million typically took three times longer to sell compared to properties under $300,000.

Some neighborhoods have begun to see a flattening of sales compared to previous years. The reason is that prices have increased to a point where the area is still desirable, but $100,000+ more than it was three or four years ago. That appreciation is great for those already vested in the neighborhood, but prevents many from moving into their desired location.

We have a housing shortage in the lower price points. The cost of land, labor, and materials continues to escalate, with the hurricane, wildfire, and a lumber tariff not helping. Slower job creation in Austin, San Antonio, and Houston for 2017 have also not helped.

See what I mean now about those unevenly heated leftovers?

If someone asked me whether the Texas metro markets were “hot,” I’d say they are strong. But, realistically, I’d probably first answer with a question, “Which market are you talking about?”

Austin, DFW, and San Antonio continue to be some of the most desirable markets in the nation. Should you wait for values to drop? Never say never, but I don’t see values softening anytime soon, barring a catastrophic economic event. With rates and values rising, the time to buy is now.

Fallout from the shutdown

Last month, we discussed the potential economic impact of the government shutdown. While I don’t withdraw anything stated, realize that after a month of quibbling in Washington the shutdown had very little affect so far. However, without a long-term fix, the budget ceiling and sequester are still rattling the confidence of consumers and financial markets, which in turn is detrimental to housing.

We’ve been lucky to see appreciation around 10% in Texas over the last year. However, many questions remain: Will appreciation continue? What could slow it down? Are we at the start of a bubble?

With home prices rebounding strongly, many have wondered if Texas is entering a housing bubble. I think the answer is no – although housing has come back, it still has room for growth, and a slow down still poses a risk to the economy and markets, although for different reasons.

Starting with the current housing affordability today in Texas it is hard to argue home prices are out-of-line with the fundamentals of affordability locally or on a national basis. Today, the median price for a new home is around $240k in Austin, $176,400 in San Antonio, $187,800 in Houston, $202,300 in Dallas, and $176,400 in Fort Worth. As a state our median home price is $190,000. According to the Federal Reserve the national median is $254,000+. So even with our current pricing we are well within affordable parameters for median incomes.

The national market is a different story. Even though median values are up by a third from 2012 lows, home prices are only back to where they were in 2004. In the summer of 2004 a 30-year conventional mortgage was around 6%. Today it is roughly 4.5%. For this reason, housing affordability is still close to the 20+ year peak reached in early 2012.

So what concerns us about the fallout from the sequester, shutdown, and continued budget impasse? First remember housing is not completely healthy. On a national basis, it is about 40% of where it was before the recession. As we have discussed here previously the economic impact of construction is huge to our regional and local economies. Secondly it is called a recovery for a reason, and as we all know recovery means that there is still a risk of relapse.

Consumer confidence

This index was much more robust earlier in the summer of this year, and it was evident in home sales. Earlier in the summer we saw MLS numbers break each previous month’s numbers, sometimes at a record pace. In September, we saw sales slow. There are numerous reasons, but in my experience as confidence dips below 90, home sales slow. A healthy confidence index is somewhere between 90 and 110.

The U.S. Consumer Confidence Index (CCI) is an indicator designed to measure ‘consumer confidence’, which is defined as the degree of optimism on the state of the economy that consumers are expressing through their activities of savings and spending. Global consumer confidence is not measured. Country by country analysis indicates huge variance around the globe.

In the United States consumer confidence is issued monthly by The Conference Board, an independent economic research organization, and is based on surveying 5,000 households monthly. Such measurement is indicative of consumption component level of the gross domestic product. The Federal Reserve looks at the CCI when determining interest rate changes, and it also affects stock market prices.

This recovery has been a confidence game. Rising consumer confidence has helped spur spending and support growth. During previous recoveries, this rise in confidence was mostly driven by an improving jobs market. Unfortunately, following this recession the recovery in the labor market has been lackluster at best. Instead, consumers have become more confident as household wealth has risen. Between Q2 2012 and Q2 2013 household wealth increased by over 10%, hitting a nominal peak of nearly $75 trillion. Much of this is due to a rising stock market, but employment here in Texas as well as housing has also played a key role, particularly for lower and middle-income households where homes represent the majority of wealth.

Should the consumer confidence index fall below 85 for an extended period of time, be aware that slower home sales is likely.

Mortgage refinancing

In addition to the afore mentioned confidence, homes can and have been used as a source of cash flow. Most home owners are no longer taking equity out of their homes, as they were for much of the 1990’s, rather lower rates have allowed home owners to refinance their mortgage at the lower rates, thus freeing up cash-flow for other spending. In recent years, the surge in refinancing helped support consumption, even as wage gains remained flat. More recently, as rates have risen refinancing activity has slowed. An index tracking the volume of mortgage activity is down by more than 50% since September of last year. In addition, sales in all Texas metros saw the number of sales fall from the previous month. Values are still escalating, but the number of sales dropped. Also during this time, some mortgage processing has slowed or stopped, for a number of reasons, one of which is seasonality. The higher sales rate of the spring and summer typically fall in September as families send their kids back to school. Rates did go up, forcing consumers to rethink their buying capabilities. And the government shutdown as well as the affects of the sequester this year have had an effect.

Fed tapering

The Fed has slowed its plans to taper its bond-buying with the economic slowdown and the lack of consumer confidence, but tapering should begin once the Fed decides the economic recovery is on solid ground and no longer threatened by the shutdown or debt ceiling debate. Tapering will probably increase mortgage rates; even changing expectations about tapering could cause rate swings. And as rates continue to go up, the affordability factor begins to be a bigger issue. In the past, as rates rose, sales increased temporarily as consumers realized they needed to take advantage of low rates.

As I’ve discussed elsewhere, the Fed will be sensitive to the impact of rates on housing. This is one reason we think the rise in rates will be modest and the Fed will pay particular attention to mortgage rates. Second, while housing looks alright, it is unlikely to provide the same tailwind for consumers as it did in ’13, when higher home prices supported confidence and lower rates helped household cash-flow through a surge in refinancing activity. As rates rise, sales will slow.

Construction, home starts, and resales

While housing represents a small part of the overall economy, it carries a great multiplier effect. New homes construction has a 5-7x effect on the local economy. That is, for every dollar spent in new construction, it effectively is respent five to seven times in the local economy. Resales don’t carry the same “dollar bounce”. Since rates began to rise in the spring, housing starts and building permits are both down by roughly 10%.

Has this slowdown or uncertainty affected home values in Texas? Presently due to strong job creation, lack of inventory and the inability to create enough inventory to address the demand, the answer is no. The likelihood of any affect seems minimal at best. Before the shutdown started, several factors were already cooling down price gains, including expanding inventory nationally, higher lending rates, and declining investor activity. Therefore, comparing how much prices have risen in October regionally or nationally to date with previous months can’t, by itself, show if the shutdown has affected asking prices.

If you happen to be in a market where the majority of jobs come from the federal government, it is different. Values have plateaued in some metros, and sales have slowed. Regionally, Killeen, El Paso, and San Antonio have felt affect as over 90,000 defense jobs have been cut in Texas this year. Fortunately, the energy sector has continued to create jobs.

The shutdown, of course, could have other effects on the housing market. The delay in data releases, like the jobs report and home-starts report, created more uncertainty about the pace of the housing recovery. Much more severe, defaulting on the debt would likely create havoc in the housing and financial markets as well as the overall economy. As of today, the worst-case scenario – another prolonged shutdown plus a debt default – is looking less likely, thankfully. But the housing recovery still depends on what the federal government will do in the coming months

Should we be worried about the new budget negotiations? As of today, with the budget agreement to end the shutdown delayed and the need to raise the debt ceiling will trigger a new round of negotiations over longer-term federal budget reforms. Recent debates over the federal budget have included various proposals for scaling back the mortgage-interest deduction, which would raise the cost of homeownership while reducing the budget deficit and short term have an impact on home sales.

Are there any other indicators to watch? I am sure there are, but these are the main ones we are watching. If you’ve been thinking about buying a home, do so quickly. Values, rates and affordability will not get better no matter what the government does.