Emails flood our inboxes every day with news that construction prices are up, inflation is out of control, and a recession is imminent. Somewhere in the mix, there are also messages telling us it’s a great time to buy a new home, construction is on the rise, and the market is rebounding to pre-pandemic levels.
So what, actually, is the deal with this recession and the current state of the market?
We at Daltxrealestate.com asked Clare Losey, assistant research economist at Texas Real Estate Research Center, and Bill Head, director of communications for MetroTex Association of Realtors.
Here’s what they had to say.
What is the current state of the real estate market?
Clare Losey: Navigating the housing market, particularly for first-time buyers, is proving particularly challenging amid considerably higher mortgage interest rates and still elevated (albeit cooling) home prices.
The average rate on a 30-year fixed-rate mortgage (around 7 percent) is now double what it was this time last year, which has pushed a large swath of potential buyers out of the market. (For more information on the specific number of potential buyers pushed out of the market, please see tables 8 and 25).
Overall, due to the rapid rise in rates, affordability has diminished. However, we will likely continue to observe declines in home prices across the state (with particularly acute declines in markets that witnessed the strongest price appreciation in the COVID-19 pandemic). As such, over the next several quarters, affordability should ease.
Bill Head: Right now the D-FW market is seeing a rapid increase in inventory and a decrease in sales numbers. The key elements to the decrease in sales is the increase in home prices and the higher mortgage rates.
Mortgage interest rates rose from 2.84 to 5.22 percent in the past year and sales prices have increased by 15 percent (comparing September 2022 to September 2021). As a result of the slowdown, homes were on the market 40 percent longer than in September 2021 and sellers are no longer selling their homes at higher than list price.
We’ve heard some talk about a recession or potential recession. At what threshold do you say, “We’re definitely in a recession”?
Clare Losey: There are multiple definitions of a recession, but the NBER (which officially dates recession in the U.S.) defines it as “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.”
Often, we don’t necessarily know we’re in a recession until the NBER tells us many months later.
Perhaps think of the COVID recession, which spanned from February through April 2020. I think you would be hard-pressed to have found someone in February 2020 who would have been able to say “we’re in a recession.” So it’s definitely not a precise science. Generally speaking, significant contractions in the labor or housing markets, coupled with a cooling economy, are the biggest indicators of a potential recession.
Two negative quarters of GDP growth, rampant inflation, and a quickly-cooling housing market suggests the overall economy is contracting. However, the labor market remains strong and household balance sheets, despite inflation, remain relatively robust (in no small part due to three rounds of stimulus payments).
Meanwhile, the Federal Reserve is aggressively raising the federal funds rate to combat inflation, which is increasing the costs of borrowing for both businesses and consumers. In my opinion, the potential to avoid a recession rests on the ability of businesses and consumers to weather the continued rate hikes from the Fed.
Bill Head: Not sure if we will see a recession in the D-FW market. Despite the slowdown in sales, there is still high demand for homes, thanks to the relocation that we continue to see in North Texas.
Is there any good news for the housing market in Texas?
Clare Losey: Yes! Supply-side constraints are easing. As a result of the higher rates (and therefore weakened demand from buyers), there is currently a much higher (and growing) inventory of homes for sale.
Over the long-term, as demand and supply come more into balance, this should help to ease affordability constraints, which became particularly acute during the COVID-19 pandemic. As prices de-escalate, it creates the potential for more buyers, particularly first-time buyers who have otherwise been sidelined, to enter the market for homeownership.
Bill Head: Healthier inventory is always a good thing for homebuyers. While interest rates are higher than in the past few years, they are still historically low and expected by many economists to return to levels seen earlier this year.
