Home sales and prices have been rising in tandem for the better part of a decade as the Lone Star State leaves any sign of the Great Recession in the dust.
In case you haven’t noticed, the Texas real estate market has been on fire. Home sales and prices are have been rising in tandem for the better part of a decade as the Lone Star State leaves any sign of the Great Recession in the dust. Key markets such as Dallas/Ft. Worth, Houston, and Austin have been leading the charge after data continues to impress year after year. The question on everybody’s mind is will it last?
While the journey is more of a winding road than a straight shot, it is one whose long-term destination appears to be expansion in the Texas housing market for years to come thanks to a trifecta of tailwinds – people, jobs, and oil.
Dr. James Gaines, Texas A&M University Real Estate Center Chief Economist, Housing Markets and Housing Development, took some time to speak with CCN.com, shedding light on just how far the Lone Star State’s housing market has come and where it’s headed in 2020 and beyond. Dr. Gaines gives us a lot to unpack. No doubt Texas housing has been a bright spot, and while there may be what he describes as a “leveling out” in the near term, the stage is set for a long-term housing boom. The one wildcard is the threat of a possible recession, in which case all bets are off.
Home prices are on the rise, both nationally and in the state of Texas. Texas has its own home price index, and it has been inching higher in the wake of the housing crisis. The state’s median price is currently hovering at $241,000 across single-family, town house, or condominium, which is a sweet spot reflecting demand and affordability.
It’s important to note that changes in median prices aren’t necessarily reflective of all properties. Dr. Gaines explains:
More often than not, in any given month, more high-priced properties are sold causing the median to go up and the next month more lower-priced properties sell causing the median to go down. Changes in median price don’t necessarily reflect change in overall home values.
Nevertheless, in Texas, everything is bigger, and that includes home sales. Home sales are the other rung in the ladder of the real estate market, and the pace has been equally as impressive. Texas home sales have been hovering at record levels for each of the last seven years.
Texas A&M is predicting both home prices and home sales will be up 4% in 2019, which surpasses last year’s rates of increase. Dr. Gaines stated:
Texas is clearly way ahead of everybody else in terms of the rate of increase in median home prices. 2019 will be bigger than 2018. And 2020 will probably be bigger than 2019.
The Texas housing market has momentum on its side:
Texas had strong positive momentum for the past seven-to-eight years. We keep looking for what could break that momentum, what could cause it to reverse. In the past, what has hurt Texas is a collapse in the oil price. The good news for Texas is that we are not anticipating that to happen.
Dr. Gaines is quick to add, though, that the rate of increase has been on the decline. For instance, three years ago, it wasn’t uncommon to see home values rising anywhere from 7% to 9%. Now it’s more common to see a rate of increase in the 3%-5% range. Of course, the housing market was coming off a lower base back then on the heels of the Great Recession.
Dr. Gaines stated:
There will be a reversion to the norm, a leveling out of the rate of increase.
One sore spot for the housing market, Texas included, has been a lack of inventory. According to Dr. Gaines:
The biggest thing holding back sales right now is a lack of inventory, and that’s a universal issue.
Indeed, while the Texas housing market is humming, and while it was among the first states to dig itself out of the crisis, it has yet to recover completely from the Great Recession. The state’s new home housing market still running at about 85% of pre-recession levels, Dr. Gaines explained, adding:
It’s happening across the country but it’s particularly acute in Texas with the population growth. We needed to build more and now we’re not building enough.
Texas has an ace up its sleeve, however, and it’s the young generation.
While the state of California may be experiencing a population exodus, Texas is enjoying a population boom. Between 2010-2018, Texas gained about 4 million people through natural births over deaths and migration foreign and domestic. No other state really came close, with Florida at a distant second with 2.5 million people. In addition to topping the charts for the number of people added, Texas was also the biggest gainer percentage wise in the period, which Dr. Gaines describes as “phenomenal.”
People are flocking to the Lone Star state for a number of reasons, not the least of which include:
Dr. Gaines said:
Economic prosperity has created jobs, and jobs have created people. The rest of the country went into a Great Recession but we went in shallower and came out faster. People started coming for jobs, and that created demand for housing.
The population boom has certainly been a major boon to the housing market in recent years. And what Texas has working in its favor is that it is a young state.
The median age in the Lone Star State is 34.4 years, with only two states boasting a lower one. As a result, many people who move to Texas wind up renting for the short-term as they search for a house, which has led to a focus on apartment development.
Being a young state, if you look at our age distribution cohorts, Generation Z is more populous than even the millennials. There’s another wave coming, age 0-19. Our two biggest age cohorts are millennials and Generation Z coming right through our markets and our areas.
He adds that the single biggest age group in Texas is 27, many of whom are still renting, noting:
Within five years, they will be buying.
Texas real estate is comprised of four major markets, the two largest of which are Dallas/Ft. Worth and Houston. The Dallas/Ft. Worth region alone is bigger than three-dozen U.S. states population wise. Houston is no slouch, either, as the No. 5 Metropolitan Statistical Area (MSA). Next in line for Texas housing comes Austin and San Antonio. While these cities are out front in the housing market, their economies are quite distinct. Houston, for instance, is the energy capital of the world.
Its economy is much more volatile and goes up and down with the price of oil and energy sector, he said.
The energy industry can take credit for much of Texas’ disproportionate share in economic growth, due in large part to the practice of hydraulic fracking for oil. Indeed, last year the U.S. was crowned as the No. 1 oil producer in the world, surpassing the Russians and Saudi Arabia. The state of Texas alone produces 40% of that oil.
Texas A&M isn’t projecting oil to be the same stimulant in 2020 that it’s been in the last several years, but it’s not likely to be a deterrent either. Dr. Gaines explains:
The price of oil will be relatively stable we think, barring any unforeseen external event like a war. If the world goes on like it is, the price of oil will be in the $50s, somewhere around $55. At that price, the energy industry will be what it is now.
The Dallas/Ft. Worth economy, meanwhile, is fueled by financial services and is considered a distribution center for trade. Dr. Gaines said:
Dallas/Ft. Worth parallels the U.S. economy in terms of labor distribution and industry. There is a high correlation. Generally, I tell people there pay attention to the nation because as goes the nation, so goes you.
While Dr. Gaines characterizes the health of the U.S. economy as “mediocre,” he adds it’s been doing well enough to carry Dallas/Ft. Worth. In fact, according to Dr. Gaines Texas “has gotten more than its fair share of growth in the prosperity of the country.”
The one wildcard that stands to threaten the pace of growth in the Texas housing market is an economic recession. Dr. Gaines characterizes it as “the biggest risk to a housing boom,” adding that the darkest cloud looms over the global economy.
The rest of the world by and large is not doing as well as we are and ultimately we’re part of that global economy.
If a recession hits, Texas will not be immune to it. The second biggest U.S. state is also vulnerable to the whims of the trade war, as it is the single largest export state in the country. Dr. Gains said:
Trade wars do have an impact on us. Our biggest partners are Mexico and Canada.
The good news on the trade front is that the United States-Mexico-Canada Agreement (USMCA) has been signed, though it has yet to be ratified, tensions between President Trump and Canadian Prime Minister Justin Trudeau notwithstanding.
Meanwhile, with the housing crisis so close in the rear-view mirror, it’s hard not to wonder if there is another perfect storm forming in the U.S., one that is reminiscent of the sub-prime housing crisis. But Dr. Gaines explains that credit standards have become more stringent since then, and besides, there’s no bubble in sight.
There’s no evidence now at the U.S. or Texas level that we’re in the kind of bubble we were in 2005, 2006, 2007 leading up to the Great Recession. We’ve not see the magnitude of price increases, which is generally what a bubble is – unsupportable increase in property prices. We’ve just not seen that.
He delicately warns, though, that hindsight is always 20/20.
Let me clarify. Economists never know there is a bubble until after the fact.