DFW OVERVIEW
Part 2: Housing Market Outlook
Ted Wilson
Housing Consultant
Residential Strategies, Inc.
In Part 1, we examined the recent changes in the mortgage and housing markets — the forces that changed the landscape and why they occurred. In this section, we will discuss the outlook for the DFW housing market. In particular, we will examine the factors that make DFW different — and better — than many other housing markets in the United States.
Discussing the housing market is a lot like discussing the weather. We look at the national map, observe weather patterns that may be coming our way, but we dress for the local weather. Housing is similar. We listen to discussion on the national issues, but we buy and sell houses based on the particular factors affecting a particular neighborhood. There really is no such thing as a national housing market, only a collection of local markets. When these local statistics are aggregated, they give us the metrics that describe our regional or national conditions.
If you have been considering the purchase of a new home, there are several distinctions between the DFW market and the national averages. While there is always unpredictability about the future, we are hopeful that the facts presented here at DFWHousingFacts.org will provide some insight and help you in making your home purchase decision. We live in the information age, and knowledge is power!
To begin with, lets look at the supply and demand factors in the DFW housing market:
Supply (Housing Inventory)
DFW new home starts crested in 2Q06 at an annual running rate of almost 51,000 units. At that time, builders were producing about 6,000 more houses per year than were being absorbed. From Part 1, you will recall that this was the point in time when the mortgage qualification standards begin to tighten.
Since that time, builders have dramatically slowed down their pace of new construction. Nonetheless, with an excess supply of houses already finished and more in the pipeline, it will take time for this overhang of inventory to be mopped up.
In essence, the builders are shifting their organizations and construction patterns to conform to the new standards of mortgage qualification. They are now closing about 7,500 more houses per year than they are starting as they adjust back to a more normal market. The builder community has been motivated to move the overhang of finished inventory, so the consumer has found that there are incentives available in many neighborhoods.
The spring 2008 market offers a ‘last chance for the consumer to seize the opportunity presented by these completed homes. The consumer should understand that the under- construction pipeline is now at its lowest level in 14 years. Drive around and observe the lack of construction. You will notice that there just arent the ‘sticks in the air like there used to be.
The point is that, once the remaining finished inventory has been sold down, its gone. Builders arent motivated to provide incentives on a to-be-built home like they do on a completed home where their equity may be tied up. Why provide a discount on something you havent started? Moreover, the lenders to the builders are much more conservative than they have been in the past, so dont expect to see another wave of ‘spec homes to be introduced to the market. Lenders are first going to want to make sure that the buyer is going to close on the home under contract.
A fact about the DFW housing market is that it has a lower monthly supply of new home inventory than most other parts of the nation. So dont be confused by national housing stories regarding this issue. Its different in DFW. We expect much of the overhang of unsold homes to be worked down this spring. And dont be tricked into thinking the good deals will last forever. They wont!
Demand (New Homes Being Closed)
Demand is defined as the number of households that purchase a new home. A common misperception about the DFW housing market is that there was a significant change in the market drivers that shape housing demand. In fact, the market drivers have remained very steady. Job and population growth are the two most significant and closely-watched market drivers. Both have remained robust through the housing downturn. In fact, the downturn in the housing market was the first in DFWs history that was not precipitated by job losses, a downturn in the economy or significantly higher mortgage rates (the normal reasons for a fall-off in housing demand).
What did change were the rules on how the consumer now qualifies for a mortgage. Gone are the days of easy credit where even those with the weakest credit could still qualify for a new home loan. By some national estimates, as many as 35% of the loans written in 2006 could not be written today under the new stricter mortgage qualifying guidelines. This has effectively eliminated several of the households that never should have qualified for a loan in the first place.
Just because there have been changes in the mortgage qualification process doesnt mean you cant get a loan. Conventional loans (FHA/VA, Freddie Mac, Fannie Mae) are readily available, as are Jumbo Loans (loans over $417,000). However, the rates are slightly higher than before. The main concern of lenders is that youre going to repay your loan.
If youre considering the purchase of a new home, check your credit up front with a qualified mortgage broker or financial consultant. If your credit is weak or damaged, understand that there are programs designed to help you fix your credit so that you can qualify for a mortgage. The fact is, for those serious about a home purchase, ownership is still very much within your reach in DFW. Expect to put equity into your home. The 100% finance days were part of the easy credit era.
The outlook for DFW housing demand still looks quite bright. According to the Texas Workforce Commission, North Texas created over 65,000 net new jobs in 2007, making it one of the top growth markets in the nation.
According to Economy.com, DFW should continue to be the top growth market in the country through 2011, growing by over 100,000 people per year. A projection by the North Central Texas Council of Governments has the area population growing from just over 6 million people today to 8.5 million people by 2030!
Housing Affordability
Why all the growth? Certainly the reasons for Sunbelt in-migration that has fueled DFWs growth for the past half century will remain intact. But also examine housing affordability. Of the top 20 largest metropolitan areas in the nation, Houston and DFW are ranked as the two most affordable cities when it comes to housing. A household earning about $60,000 can afford to purchase the median priced new home in these markets. In 14 of the 20 largest metropolitan areas, the household has to earn over $100,000 in order to afford the median priced home. Say what you will about declining house values in California — housing still is and will remain expensive there. With fewer aggressive mortgage products available to the consumer in those coastal markets, the trend will be for families to move to Texas if they want to own a home. Businesses are paying attention too; employees get a lot more home for their money in DFW.
Mortgage Rates
One of the concerns that buyers have expressed today is whether they should consider a new home purchase in light of the weakening economy. The first and most important factor to consider is whether your job and household cash flow is secure. Assuming they are (recessions typically increase unemployment by only 2%), there is one outstanding advantage presented by the slowing economy — very attractive mortgage rates!
The Federal Reserve has lowered the Fed Funds rate (affecting short term interest rates) in an effort to stimulate the economy. While short-term and long-term interest rates act independently of each other, the general bias has been for the long-term rates to decline as well. Lower mortgage rates mean housing is more affordable as well — and you can purchase more home for the money. House refinance activity has also surged with the lower rates.
But understand that once the economy turns the corner and begins to improve, the Federal Reserve is likely to increase rates again. The point is, there is a window of opportunity right now with low mortgage rates that should not be overlooked.
Housing Values
Another common misperception in the housing market is that housing values in DFW should be declining with the housing slowdown. As was explained in Part 1, housing values in DFW did not inflate during the first half of this decade like they did in most coastal markets. As a result, housing values in DFW are much less at risk to decline today. Owners of real estate have a similar basis in value, so sellers dont have the same likelihood to undercut property values as has been the case in many of the coastal markets.
Another important consideration is that once the current supply of housing inventory in DFW has been worked down, housing values will become that much firmer. With a strong likelihood that the mop-up of excess inventory will take place this spring, dont expect to see discounting as a future trend in DFW housing.
PMI Mortgage Insurance Co. ranks DFW as one of the least risky markets in the United States when it comes to property devaluation. The Office of Federal Housing Enterprise Oversight (a government entity that oversees Fannie Mae and Freddie Mac) showed that for the period 4Q06-3Q07, nationally values were up only 1.79% (slumping 0.4% in 3Q07). However, in Dallas they were up 4.03% and in Fort Worth up 4.76% for the annual period. Another group that measures values is Standard & Poors Case-Shiller Index. For the 12-month period ended November 2007, this index showed that year-over-year values in the national 20 City Composite Index had declined 7.7%, the biggest decline in their history. Dallas, on the other hand, had dropped a slight 1.2%. Finally, Residential Strategies, Inc.s measurement of the median base price for DFW new home starts shows that it has increased between YE06 to YE07, growing from $190,910 to $202,817.
DFW is a Low Risk Market
Median New Home Price Continues to Climb
The progression of housing appreciation has been slow and steady in DFW — a very different path than that taken by many of the coastal housing markets. As a result, the likelihood that housing values will remain firm in DFW is very high.
Conclusion
There has certainly been a lot of negative press regarding the housing market. Fortunately, as we have outlined in DFWHousingFacts.org, the DFW market has been spared much of the carnage that is visible in housing markets in other parts of the nation.
Home ownership is still very much the American Dream and the wide selections of new homes available in the DFW represent some of the best values that you may ever see. Moreover, the current market conditions make it a very advantageous time to consider the purchase of a new home.
DFW is a vibrant metropolitan area and will no doubt experience ample growth in the future. At DFWHousingFacts.org, we believe that there are bright days ahead for the DFW new home market. We hope that this market explanation, as well as the other information presented in this web site, is helpful as you make your new home decision.
If you missed Part 1, please refer to the first article, Mortgage Market Meltdown – What Happened?
Overview Videos:
Affordibility
Good Time to Buy
Housing Values
