Is The Texas Housing Market Hot, Cold, or in Freefall?

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Is The Texas Housing Market Hot, Cold, or in Freefall?

Before getting all fired up thinking this article is slanted in favor of its publisher, know this: it is not. The reality is the Texas housing market is transitioning from piping hot to cool. It is not in, nor is it expected to freefall. This means homeowners are, at least for several more months, still in control. Second, how many homebuyers would openly admit this? And how many investors publish articles that give away secrets like the 5 tactics homebuyers use to lower your price, how to stop real estate investors from spamming your phone, or 4 negotiation tips home investors don’t want you to know? You’ll be hard-pressed to find even 1 other.

Our purpose is to educate homeowners so that they can make the decision that most effectively addresses their needs. In pursuit of this purpose, this article is backed by empirical facts and data from respected, credible sources, of which, are cited herein.

What’s in it for you

  1. What caused the Texas housing market to get so hot
  2. Reasons home values in Texas could continue going up
  3. Signs that the Texas housing market is cooling

How Texas housing prices caught fire

The Texas housing market has been on fire! Since the pandemic began in March 2020, the rule has been double-digit appreciation, giddy sellers sifting through gaudy offers, and frantic buyers upping their bids tens-of-thousands above asking price. According to the National Association of Realtors (NAR), May 2022 housing prices fired up 14.8% when compared to May 2021 and have skyrocketed 45% since the pandemic began. It’s been a heated Texas housing market party, and it’s lasted far longer than anyone expected.

What happened to cause Texas home values to get so hot?

1. Federal policies in response to the pandemic
The Texas housing market began its climb when the US government enacted emergency policies aimed at fighting the economic impact of COVID – the eviction and foreclosure moratoriums, stimulus checks, student loan pauses, and historically low interest rates. In so doing, $6 trillion dollars ($6,000,000,000,000) in new money was printed. To give this perspective, during the 2008 financial crisis, the US government printed $800 billion ($0.8 trillion) to bail out the big banks.

Of the $6 trillion printed, $4 trillion was doled out in stimulus checks. The idea was to stimulate the economy through investments in the economy but because COVID remained rampant and kept people home, instead of increased consumer spending, much of that capital flowed into financial assets (e.g., stocks, crypto, real estate).
When the lockdown subsided, we went from economic standstill to spend mode, and with historically low interest rates levering up values even higher, Texans began spending with reckless abandon. As a result, demand increased, supply decreased, and the Texas housing market soared.

2. Texas’ favorable tax laws spurred a hot housing market
It’s no secret Texas has seen a massive influx in population. With enticing tax incentives and no state income tax, Fortune 500 companies like Hewlett Packard, Oracle, and Tesla have all moved their headquarters to the Lone Star State. Californians following jobs or looking for warm weather with a lower cost of living, have only added fire to Texas’ already hot housing market.

Why the Texas housing market is in trouble

The state of the Texas real estate market cannot be understood in a vacuum. One must instead consider its place within the overall economy which is made up of 6 interconnected dominoes and each domino causes the other to fall:

  1. Capital: when access to money becomes restrictive (e.g., high interest rates) or when money is tied up in illiquid assets (e.g., real estate), the 2nd domino begins to fall.
  2. Business Growth: when interest rates rise, businesses contract and the 3rd domino begins to fall.
  3. Jobs: when businesses contract, layoffs ensue, and unemployment rises.
  4. Stock Market: when unemployment rises (the unemployment rate is the primary indicator for an expanding or contracting economy) institutional investor selloffs ensue, and the 5th domino begins to fall.
  5. Consumer Sentiment: when the stock market falls, public fear sets in, consumer sell offs ensue, and the 6th domino begins to fall.
  6. Real Estate: when consumers are fearful, spending slows, demand lowers and supply increases, and the real estate market begins to shift to a buyers’ market. The shift takes time as sellers sober and let go of the drunken value of last year and what their neighbors sold for in a totally different Texas real estate market.

Currently we are teeter-tottering between dominoes 5 and 6. What could cause the 6th domino to fall? Consider these 6 troubling signs for the Texas housing market.

A cratering stock market spells trouble for Texas homeowners

Since the start of 2022, 14% of all global wealth has been destroyed. For context, during the 2008 financial crisis 19% of the world's wealth was destroyed.

Stock market darlings like Amazon are down 35%, Apple is down 25%, Facebook is down 50%, Google is down 23%, Netflix is down 70%, and Tesla is down 41%. The NASDAQ is down 30% but if you exclude its highest flyers, the median NASDAQ stock is down 70%. All the while, the S&P 500 is headed for its worst 6-months in 52 years.

What does this mean? According to Chief Investment Strategist of Bank America, Michael Hartnett, “in a quarter or two, we are going to be in a recession. Technically, we’re already in a recession but just don’t realize it yet and there are more shocks to the system to come.”

As the economy contracts and consumer spending slows, for those willing to pay attention, a floundering stock market signals big trouble for Texas housing markets.

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Rising interest rates means less home buying power for Texans

Mortgage rates have practically doubled in less than a year and are projected to soon surpass 6%; the highest level since 2009. The problem with rising interest rates is it reduces buying power which further restricts the size of the home buyer pool. Last year home buyers looking for a $625,000 home with a $500,000 mortgage at a 3% interest rate could expect a $2,100 monthly payment. The reality in 2022 is the mortgage for the same home jumps $900 to $3,000 per month at a 6% interest rate.

Practically speaking, doubling interest rates from 3% to 6% restricts the purchasing power of home buyers by 30%. Moreover, most people intuitively understand that paying a high interest rate on a home that's 30% more expensive than 1 year ago is probably not a good idea. The result? The Mortgage Bankers Association recently reported “a steep decrease in mortgage applications to buy and refinance which pushed the market index down to its lowest level in 22 years.”

Inflation is cutting into the purchasing power of Texas homebuyers

In June, inflation hit 40-year highs at 9.18% translating into consumers spending $510 ($6,120/year) more a month when compared to June of last year. With spending on everyday items requiring more of monthly budgets, consumers have less income for a mortgage payment.

Meanwhile, wages haven’t kept up with inflation, creating an affordability squeeze. According to NAR, wages have risen but only slightly to $212 per month meaning that Texas home buyers are coming up short by nearly $300 per month. This serves to further cut into the purchasing power of Texas homebuyers.