The Outlook for Home Sales in 2014

I recently had the privilege of making a presentation to the residential members of the Texas Association of Realtors. Their fall meeting is always a good time to look forward to next year. The outlook for home sales in 2014 in Texas looks very promising.

The real estate industry is always keenly interested in the outlook for transaction volume. If you have ever made a living on commission, you know why.

When I was in graduate school in Austin, we had a saying: “If you torture data long enough, it will confess to anything.” Well, the Center’s research economists have tortured Texas home sales data for decades, and we have found that three things help predict future home sales volume:

  • job growth,
  • cheap mortgage money and
  • home price appreciation.

Texas continues to create jobs at an impressive rate. You can follow this progress each month with our Monthly Review of the Texas Economy. In the 16 years that I have worked at the Center, Texas has continually outperformed the national average for job growth. Often Texas is double the national average. That job growth is likely to continue through 2014. Texas has added over 459,000 jobs since January 2012.

Mortgage rates are increasing, but they are still ridiculously cheap. When I was selling houses in the late 1970s, we thought 8 percent was cheap. Five percent was unheard of. Now the media is gnashing its teeth that higher mortgage rates will derail the housing recovery.

Right now, Fannie and Freddie are almost 100 percent of the mortgage market. Fed Chairman Ben Bernanke buys almost all the mortgage bonds that Frannie can create. When the Fed stops buying all the mortgages in America, it’s possible that rates will increase. However, take a look at jumbo mortgage rates for evidence.

The Fed is not buying jumbo mortgages. The market is determining those rates, just like a free market is supposed to do. The current rate on jumbo loans is essentially the same rate as 30-year conventional loans. Jumbos historically have been viewed as riskier loans than conventional mortgages. So when the Fed stops buying mortgages, I expect the rates for 30-year mortgage loans to approach those for jumbos.

An increase in mortgage rates will not cause houses to be unaffordable. Check the numbers for housing affordability indices in Texas and the nation. Houses have never been more affordable, if you have a job. A recent Real Estate Center calculation indicated that even if mortgage rates were to rise to 7 percent, houses would be just as affordable as they were in 2007. If your memory is short, 2007 was a good year for selling homes in Texas.

Home price appreciation is caused when you have too many buyers and not enough sellers. The most common measure of this is called the “months inventory.” Center research years ago showed that 6.5 months of inventory could be viewed as a balanced market with modestly increasing prices. Texas, like many parts of the country, is short on inventory of homes for sale. The entire state of Texas has just four months of inventory. Austin has less than three months. Because of the limited inventory, prices are expected to continue to increase smartly.

This constrained supply of homes in Texas (and elsewhere) is likely to continue through 2014 because home builders are having a difficult time getting loans to build new houses. Texas needs to be building thousands of new homes now to meet demand. But bad memories of the Great Recession and pressure from bank regulators have restrained new home construction. Ditto new subdivision development.

Looking forward to 2014, the housing market in Texas most likely will be hot. Home builders will not be able to build homes fast enough to meet the demand. Developers won’t be able to supply lots to meet demand. Hence, prices are likely to continue to move up. Higher prices spur more buyer demand. Transaction volume will most likely increase as well.

In 2012, I suggested that real estate professionals not take a vacation until after Labor Day. I mentioned that things would get slow when Congress created the debt ceiling drama. Well, if you are a real estate professional in Texas, I would suggest that you not take a vacation at all in 2014. Things are shaping up to be a good year.