2018 Housing Market Challenges!

In any given market, inventories fluctuate based on supply and demand considering area and price range. The National Association of REALTORS® considers a balanced market to be a six-month supply of homes.

If it takes longer than six months to sell, it is thought to be a buyer’s market and less than six months, a seller’s market. Most buyers and sellers probably feel a balanced inventory is more like three months’ supply of homes.

The U.S. inventory of existing homes has been reduced to approximately 1.5 million houses which is 10.3% lower than a year ago. According to the Federal Reserve Bank of St. Louis there are 5.7 months of inventory of new homes currently on the market in the U.S.

The Texas housing market started the year with inventory obstacles but shows signs of improvement. The shortage of homes priced under $300,000 restrained sales to only 1 percent growth and heightened affordability challenges. Demand showed little signs of abating as the state and national economies strengthened. However, rising residential loan values, building permits, and housing starts indicates a positive supply-side response. The challenge remains not only for developers to expand the housing stock but to do so at the lower end of the market.

The Texas months of inventory (MOI) opened the year at an all-time low of 3.4 months, down 4 percent YOY. Supply conditions worsened in the market for homes priced less than $300,000 as the MOI sunk below 2.9 months. This price range accounts for more than 70 percent of homes sold through an MLS. Minimal inventory in the bulk of the housing market illustrates Texas’ diminishing affordability advantage.

The search for affordable housing stressed the existing home market, where homes are generally less expensive than newly constructed equivalents.

The Texas existing home MOI held below 3.2 months as the number of active listings remained suppressed. Steady demand whittled the resale MOI below two months in Austin, Dallas, and Fort Worth with little signs of relief. The San Antonio MOI approached record lows at 3.1 months as sales exhausted active listings. In Houston, resale inventories failed to return to pre-Harvey levels, holding the MOI at 3.2 months.

The new home months of inventory slid for the fifth straight month, falling below 4.6 months for the first time since 2014. Inventories were particularly constrained in North Texas. The MOI held at 3.7 months in Dallas, while sinking to a record low of 3.3 months in Fort Worth. Increased housing activity in Austin’s new home market pulled the MOI down to 4.3 months, offsetting last year’s supply expansion. On the other hand, Houston’s new home sales slowdown balanced the MOI at five months.

Inventory has a direct impact on price. When demand is constant, but inventory is reduced, price tends to increase because the same number of people are trying to buy a smaller than normal number of homes.

Texans’ search for lower-priced options restrained growth in the new home market, pushing the new home DOM to a five-year high of 98 days. Fort Worth and Houston reached annual highs at 86 and 101 days, respectively, while the DOM surpassed 101 days in San Antonio. New home demand was hardly stronger in Austin where the DOM hovered around the statewide level. Despite Dallas’ affordability challenges, demand for new homes remained strong, averaging 83 days on the market.

Robust U.S. and global economic growth heightened inflation expectations and elevated interest rates. In their January meeting, the Federal Reserve Board hinted at three federal funds rate hikes this year as the national economy hovered around full employment.

The ten-year U.S. Treasury bond yield rose 18 basis points to 2.58 percent, its largest monthly gain in over a year. The Federal Home Loan Mortgage Corporation 30-year fixed-rate jumped above 4 percent, maintaining upward momentum. While rates remained low by historical standards, even slight increases could hinder mortgage financing, particularly for first-time homebuyers.

As easy as it is to recognize the signs of spring, one is able to spot the direction prices and interest rates will be moving. When prices and mortgage rates are increasing, buyers are affected by not being able to afford the same price or size of homes.

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