Has the residential real estate market changed? For the better or worse?

By Mark Sprague, State Director of Information Capital

A question Realtors, economists, real estate analysts, and more have been getting for the past 18+ months: Has the residential real estate market changed? For the better or worse?

Contrary to owners/investors’ fears, the so-called “strong housing bubble” of the last 3+/- years has not burst (“bubble” in quotes because we never had a bubble by any definition). Instead, a gentle decline in both supply and demand has struck a balance, resulting in a boost to the housing median price/value. Throughout the first half of 2023, Texas’ median home prices consistently show a 0.3-0.4 percent monthly increase.

Due to current owners’ reluctance to sell their existing property (locked into a home financed at a lower interest rate, i.e., “Why would I sell my current home for a smaller house and higher payments?”), the demand for new construction has significantly increased. This shift in preference has led to a swift climb in the market share of new construction, which surpassed 20% in June (historically, builders control 15% to 25% of housing markets). Due to a lack of resale inventory plus strong demand, new construction should move up to a 30+% market share over the next two years.

Let’s focus on the shift in the Texas metro residential real estate market that began about 18 months ago, as the Federal Reserve raised rates to fight inflation in March-April of 2022, leading to slower sales and market environment over the past year. (While rates are higher, they remain below pre-2009 levels.)

I need to remind you that this market cycle has been very different from others we’ve experienced over more than thirty years. One of the clearest indicators of this difference is the ratio of sales (houses, condos, and townhouses) versus the number of listings each month since 1990. (For reference, in 1990, Texas was coming out of the S&L/oil collapse. 1,617 commercial and savings banks failed between 1980 and 1994. There were tons of foreclosures in Texas and the oil patch, with a 90% loss of real estate value, both residential and commercial.)

Over the last 30+ years, a monthly average of about 35% of active listings were sold each month. Before 2013, the average was much lower at 22%. 2012 was the year we emerged from the “Great Recession,” and 2013 was the first year of the current market cycle. With rare exceptions, absorption of active listings has been above 34% since 2013 and was driven to a much higher average of 70% by the frantic period in 2020, 2021, and early 2022. In March of 2021, our market actually sold three times as many homes as were listed! Through 2022, the market easily absorbed 80+% of each month’s listings.

This supply-and-demand imbalance has obviously impacted home prices (as well as other real estate channels); as stated above, value increases have slowed in 2023 but are still increasing monthly. Why? More inventory is needed.

Yes, inventory supply has crept up to more than three months. That is still not a balanced market if you go by the standard wisdom that six months of inventory is parity. We could easily burn through that inventory as more and more potential sellers decide not to sell due to the ‘locked-in effect’ of having much lower mortgage rates than current rates available now. Yes, ‘days on the market/DOM’ has increased, but again, that is more of a move toward a ‘normalized’ market.

Again, we are a long way from a balanced six months of inventory (the point where inventory changes a ‘sellers’ market’ into a ‘buyers market’). In addition, a buyers’ market brings discounting off the list price. This is not apparent presently, with most homes selling above 95% to 98% of the list price. (Pricing appropriately – closer to the median value – historically makes for quicker sales and fewer negotiations on value, etc.)

Rates have increased at the fastest pace in US history over the past year, and sales prices continue to be driven above the long-term trend lines.

So, back to the question, are values going up or down? Every month, each of our Texas metros has continued to see appreciation, with little chance of de-escalation due to a lack of inventory. So, those waiting for values to drop or be discounted will not see those goals met. If you want/need to buy, waiting will cost you both in value and monthly payments.

Consider these trends when thinking about whether or not you should wait to buy.

• Due to job creation, inventory remains low—a longer trend expected to last 4 to 5 years.
• Rents are not slowing. Concessions on rents are small, with little to no chance of escalation. Any slowing is in the rental market is temporary. Stricter lending standards for commercial loans will slow down new construction of apartments, leading to more competition for existing properties and higher rents.
• The cost of Labor and materials will continue to rise due to lack of availability.
• Lending rates will remain at this level or higher due to inflation. “Marry the house, rent the rate” is now the buzz phrase on the street.
• Based on the points above, values/prices will remain strong for a while.
• The lower-than-normal lending rates (less than 6%) of the last 15 years are likely a thing of the past. i.e., there is no real opportunity of getting a much lower rate in the near future….

Some may disagree with any or all of the above, but I have spent the last 40+ years analyzing market trends in housing, financing, consumer behavior, and more. I am not a Realtor or lender, but I track the data and speak to where the market is headed. Time will tell!