Houston, Tx
Inventories Up, Prices Down
For buyers, the reversal of the long-standing price increases has begun. Total Listings and Inventory (as measured in months) have increased dramatically as home sales have slowed and sellers rushed to try and sell during the popular summer season. Total listings have increased 15% from 29,344 to 33,711 in one month while Inventory sits a 2.5 months (and no signs of reversing anytime soon).
As you’d expect, with more options and higher mortgage costs, that means lower prices. Both the median and average prices for Houston homes have started to slowly move down from the highs to $348,740 and $426,494, respectively, representing about a 2-3% drop from the highs.
Home Sales Dropping Quickly
June reflected a turning point on home sales, which dropped 8.6% year over year. With increasing costs of ownership rapidly eclipsing both wage increases and the rental opportunities in the market, it’s no wonder prices & sales have begun to fall. July was one of the worst months seen in the COVID era. July numbers came in at 8,370 single family units sold with month over month sales dropping 14% from June down 17.1% from July 2021.
Mortgage Rates Remain High
Mortgage rates have remained high, which was quite the showstopper on increasing asset prices. Mortgage rates this high (and potentially higher), should accelerate price drops moving forward into the year as we move from a high demand season into a much slower season. At current rate levels, the required income far exceeds the average income earned. Simply put, not only do homebuyers not want to buy properties at these prices (because renting is a better alternative and near-term price drops), they can’t afford to buy properties at these prices. Unless rates drop, income increases (dramatically), or rents increase significantly from already high levels, then expect prices to continue to push lower.
The Story of 2022: Rents on the Rise
As I mentioned in my article last month comparing renting and buy, consumers will move to the best alternative in the marketplace. At the start of the year, that alternative was to buy a home where we saw increased home sales even as mortgage rates moved higher. This was because there was an increased sense of urgency to buy now at low interest rates or get priced out along the way up. Standard lending practice is to provide a 60-day rate lock on interest rates giving homebuyers the ability to capitalize on relatively affordable rates (sub 5%).
However, once those monthly total costs began to increase substantially as seen in the graph below, we hit an inflection point in April where both the Average Total Cost, Average Actual Cost (total cost less principal paid), and Median Total Cost all exceeded Rental Costs. Because of the 60 day lock on mortgage rates, home prices and sales didn’t drop until later in June when those rate locks rolled over from the March/April rates and it became unaffordable or unreasonable to buy. As you can see in the graphs, May sales were still strong, likely due to buyers having rates from March.
Once those interest rate lock periods began to roll over though, consumers rushed into their best alternative, renting a property. This increase in demand has pushed rents up nearly 10% over a 4-month period from March to July! Historically, that is an absurd amount in a short period of time. To give you perspective of how drastic an increase that is, the cumulative rent growth from January 2017 – January 2021 was 20.5% over a 4-year time frame.
Future Expectations – Where do we go from here?
Even though rents have increase substantially past their historic average, they are still cheaper than buying a property. Because mortgage rates will continue to remain high (and potentially go higher), in the near-term you can expect rents to continue to rise at a faster than average clip while home prices/sales continue to slump over the next 6-12 months. This will likely continue until the monthly payments of rent and the monthly payments of a mortgage fall back into line.
Near Term Drop / Long Term Increase
If you are a soon to be buyer, you may want to consider buying in the next 12 months as prices drop further. The reason we recommend this is because our prediction is that in the medium term, home prices will begin to pick back up after this route. I wouldn’t count on a major recession to destroy home prices like it did in 2008-2009. This recession is a unique recession where wages/unemployment remain strong, consumers have a strong balance sheet, and builders have not over-built. Thus, if wages continue to increase, and we see less builds because of high construction prices, home prices are sure to continue back up once they get within a threshold where it “makes sense” to buy. Currently, we still have a large shortage of homes for the number of buyers and while prices will come down in the near term, property values likely won’t drop substantially unless we see a rise in unemployment, rates move quite a bit higher or home supply jumps (see our article earlier this year), which isn’t out of the question.
Keep up-to-date by visiting www.parceto.com to read our monthly reports as the year unfolds and we get a better picture of where the market for real estate might head next.
Comparing Value: Rent v. Buy Chart (August 2022)
—
The information and details contained herein have been obtained from third-party sources believed to be reliable, however, Parceto Real Estate has not independently verified its accuracy. Parceto Real Estate, it’s owners, stakeholders, and employees make no representations, guarantees, or express or implied warranties of any kind regarding the accuracy or completeness of information and details provided herein, including, but not limited to, the implied warranty of suitability and fitness for a particular purpose. Interested parties should perform their own due diligence regarding the accuracy of the information.
Any information provided herein, is being provided subject to errors, omissions, changes of price or conditions, and withdrawal without notice. Third-party data sources used in this article include: The Houston Association of Realtors and Freddie Mac. All content is provided on an “as is” basis, with no warranties of any kind whatsoever.
You should always consult with the assistance of an appropriate professional before making any decision. Opinions, estimates, forecasts, or other views contained in this document are those of Parceto Real Estate, and no information referenced in the article should be considered investment advice.
© 2022 Parceto LLC, d.b.a. Parceto Real Estate, all rights reserved. Third-party image sources: shutterstock.com, adobe.com
Online Information Sources:
Freddie Mac, “Mortgage Rates.” Freddiemac.com, 18 Aug 2022, https://www.freddiemac.com/pmms
Houston Association of Realtors, “Houston Housing Gets Another Tap on the Brakes in July” Har.com, 10 Aug 2022, https://www.har.com/content/department/mls?y=2022&m=08
Houston Association of Realtors, “Single-Family Rental Homes Continue Taking Up the Slack from Slowing Sales” Har.com, 17 Aug 2022, https://www.har.com/content/department/newsroom?pid=1876
