Mortgage interest rates are up, so why haven’t Houston housing prices dropped?
The short answer is that for prices to drop there must be a drop in demand AND a rise in supply at the same time. In real estate we measure this in Months of Inventory, which is the amount of time that it would take to deplete the existing properties for sale at the current pace of sales. A market is considered “balanced” at 6.5 months of inventory, according to the economists at The Real Estate Center at Texas A&M University1. We are at 2.8 months in Houston today2, far from an inventory level where a pricing shift would be expected.
Now for the longer answer …
Market wide, closings and pending listings are down considerably since interest rates began rising. You would think this would lead to a rapid rise in inventory, however, new listings have been trending flat for most of the year, and sellers withdrawing from the market … way up. This is the reason inventory increase is creeping – not spiking – even though demand has considerably collapsed. The Weekly Activity Snapshot that the Houston Association of Realtors distributes captures these trends1.
For there to be a significant, market wide price shift, more listings need to materialize. New listings can come from either new home builders or owners of existing homes. To monitor builders, we watch residential building permits, housing starts, and housing completions. Permits and starts are going in the other direction; they’re dropping. The only one of those metrics that is up is completions – but it just seems to be builders finishing projects that are already in their pipelines4.
Existing owners are trapped by their low interest rates and aren’t interested in becoming sellers, because they would be trading that low interest rate for a higher one. As a result, they might not even be able to afford a new home that is equivalent to the one they already own and can afford. Consequently, don’t expect a major increase in inventory from either source unless there is distress on the way.
So, is there distress on the way? Here are some things to look for:
- Drop in job openings: Nope (https://www.bls.gov/news.release/jolts.nr0.htm)
- Rise in layoffs: Despite the news about Facebook and Twitter, nope, not yet. The number of layoffs dropped. (https://www.bls.gov/news.release/jolts.nr0.htm)
- Unemployment rate to 6%: Nope (https://fred.stlouisfed.org/series/UNRATE)
- Savings depletion: Not yet (https://www.investmentexecutive.com/news/research-and-markets/u-s-households-still-sitting-on-excess-savings/)
- Increased credit card balances: Yes, credit card balances are rising (https://fred.stlouisfed.org/series/RCCCBBALTOT)
- Mortgage delinquencies: Nope (https://www.mpamag.com/us/mortgage-industry/market-updates/mortgage-delinquencies-arent-affected-by-inflation-yet/425618)
Note that the traditional path to foreclosure is outlined in the sequence above. First your job goes away, savings get used, then you live off credit, fall behind on your mortgage when you run out of credit, enter into a forbearance agreement with your lender, default on that, not modify your mortgage, and then after all of that, go through a foreclosure.
How long does that path take? To get to the point of a mortgage default would depend on borrowers’ resources and could be months to years. Once a mortgage default occurs, even in Texas with a very short timeline for foreclosures, the lenders would likely attempt modification before going through foreclosure. This is one of the lessons learned from the pandemic as lenders successfully dealt with so many borrowers in forbearance and worked out cures in a medley of ways5. A failed forbearance agreement without a subsequent cure could add even more months at a minimum to a process that already takes several months to begin with.
For the sake of argument, if we do head in the direction of significant distress, how fast can it take to get from where we are now at 2.8 months of inventory2 to above 6 months of inventory? Well, in 2008 when the housing market went into recession, we were at 5.7 months of inventory in Houston6. We didn’t pass 7 months of inventory until halfway through 20106. We peaked at nearly 8 months in May 20116. It took 2 ½ years for months of inventory to rise by 2.2 months. Remember, a market is considered “balanced” at 6.5 months1. Assuming the same pace following 2008, from where we are now in Houston it would take 3 years to just get to balanced, not to mention a surplus.
So again, is there distress on the way? Goldman Sachs doesn’t think so based on “credit quality7.” A borrower today has a higher credit score, more cash reserves, more home equity, and lower interest fixed rate mortgages than the pre-2008 borrower; all in an environment with lots of jobs available in the event of an employment separation.
If they’re wrong and there is a large-scale event on the horizon that would expedite an increase in housing supply, remember that most potentially distressed homeowners would probably consume their savings, credit, and home equity (at a time when 48% of debt leveraged homes are still considered “equity rich”8), then fail to negotiate with their lenders, before they give up and walk away from their homes. It could very well take a while for a home seller to face a “must sell” situation, probably much longer than it did after 2008 given the profile of the typical borrower is much less “subprime” in 2022. Possibly long enough even to make it to a subsequent recovery, like not much even happened.
Because you’ve found your way to this website it is likely that you are considering investing in residential rental real estate. I urge you to take the next step toward making that a reality. If you’re waiting for a repeat of 2008, I think you are going to be disappointed. If your next step is to learn more about how to do it, then call Lifestyles Unlimited and get access to the best real estate investing education there is, and definitely get a mentor. If you already have a Lifestyles Unlimited Mentor, then reach out to a Lifestyles Realty REALTOR™ and tour some properties today!
1 https://www.recenter.tamu.edu/articles/tierra-grande/balancing-act-what-is-a-‘normal’-market
2 https://www.har.com/content/department/mls?y=2022&m=11
3 https://www.harconnect.com/wp-content/uploads/2022/11/har_weeklystats22-44.pdf
4 https://www.census.gov/construction/nrc/pdf/newresconst.pdf
6 https://www.recenter.tamu.edu/data/housing-activity/#!/activity/MSA/Houston-The_Woodlands-Sugar_Land
Contributing author:
Jeff Smith
Multifamily REALTOR® / Single Family Sales Manager
office – 713.782.0018 x1115
direct – 713.554.2247
jeff.smith@luinc.com
