Housing Slowdown Creates Opportunity for Real Estate Investors
The last few years were quite the breath of fresh air for real estate agents and sellers of homes. Finally recovering from the market crash almost 10 years ago now, sellers were back on top again, enjoying the fruits of increased housing demand fueled in part by low mortgage rates, a vastly improving economy and a general bounce back in home values.
Some cities across the country became the epitome of what was a boom in the housing market. Metro areas such as Seattle, Raleigh, Atlanta, Austin, and Dallas have attracted new residents at impressive clips over the last few years, residents who are younger and came for job opportunities in all industries but especially in high-tech jobs.
With this large influx of residents came an increased demand for housing and with it a continued uptick in the sales price of homes. Sellers and investors were reaping the rewards of this surge in prices and the demand that seemed to far outweigh the supply. Homes didn’t stay on the market for long, and oftentimes, bidding wars would drive the final sales price of homes over the initial asking price.
As prices continued to climb, though, buyers soon became priced out of homes they would normally have been able to afford. With mortgage interest rates climbing in 2018 as well, it began to create what seems like the perfect storm for a housing slowdown, especially in those cities and those regions that at this time last year was in the midst of a hot, healthy market.
Wages Don’t Support Prices
Metro areas such as Dallas have been the center of much publicity surrounding the health of the nation’s economy and job market. High-tech and high-powered companies have been flocking to the Dallas metro region for a few years now, attracting people galore who came for the job opportunities, quality of life and a lower cost of living than other major metropolises around the country.
Between 2010 and 20215, the Dallas metro region’s population grew by 10.5%. According to Bloomberg, since 2010, the DFW metro region – consisting of Dallas and neighboring Fort Worth and Arlington – created 661,000 news jobs, more than any other metro region in the U.S. The region also leads the way in percentage payroll growth since 2008.
What’s been so positive is that the influx of residents has come in the form of highly-educated young professionals. Between 2001 and 2016, the 20- to 34-year-old age range increased by 8.8% in Dallas, which is almost double the national pace of growth. In Fort Worth, this cohort increased 9.4% during that same time period.
Similar trends have been seen across the country in places such as Seattle, Raleigh, Austin, and Atlanta, where high-tech companies have relocated from higher-cost places such as Silicon Valley to set up shop, or even expand to a second headquarters. The effects were significant across the country. In late October, the Commerce Department reported the U.S. gross domestic product expanded at a 3.5% annual rate in the third quarter. Combined with the 4.2% growth rate in the second quarter of 2018, it marked one of the best six-month stretches for the U.S. economy in the past decade.
But while the economy boomed, jobs were created and wages increased, housing prices remained far out in front. Dallas had the second-strongest annual increase in employment among all metro regions in the country in September, but wages haven’t kept pace with home prices.
In many regions, in fact, home prices have increased about twice as fast as wages, squeezing buyers out of the market totally and forcing them to consider renting instead of purchasing.
Home Sales Have Slowed
What goes up must come down, Isaac Newton famously said. And while he was talking about the laws of gravity, the phrase can easily be applied to describe the current state of the housing market. The market has come back down to Earth recently, as buyers have sounded the alarm by not buying as many homes as they had as recently as last year. In November, the National Association of Realtors reported that existing home sales in the country declined on an annual basis for the eighth straight month. That marks the longest decline in more than four years.
Another factor driving the housing slowdown has been the slow but constant uptick in mortgage rates. While still considered low on an historical basis, rates are about a full percentage point higher now than they were at the beginning of 2018, which marks the highest they’ve reached since 2011. Not only does this make the entry point more difficult for first-time homebuyers, but it also serves as a deterrent for existing homeowners to sell their home and “trade up.” Real estate agents have said it’s becoming harder to persuade homeowners to sell their existing home for an upgraded one because they’re unlikely to get a sub-4% mortgage rate that they are currently enjoying.
This downturn in the housing market is being seen most prominently in the regions that experienced the biggest growth rates over the last few years – places such as Seattle, Denver, New York City, Boston, and San Francisco. In the Dallas-Fort Worth region, new and existing home sales dropped 3.6% in October compared to that time last year, the Real Estate Center at Texas A&M University said. What’s worse, the median home price growth slowed in that time to less than half the pace of just a year ago.
Dallas was one of the lucky regions to avoid complete disaster during the last housing boom, as, according to Zillow, home values in the region increased only 2.5% a year on average between 1997 and 2006. Home prices were less inflated there than in other regions of the country, so when the housing market crashed, home prices in the Dallas metro dropped less than 10% compared with the nation’s average rate of 26%.
The same cannot be said for the current times, though. Over the past five years, home prices in Dallas have skyrocketed, up to a median home value of $235,500, which represents a 50% jump over 2007. What’s worse, Dallas is more sensitive to increases in mortgage rates than other parts of the country.
According to mortgage data company Black Knight Inc., the average household in Dallas finances 83% of its home purchase, compared to the national average of 81%. But the discrepancy becomes much more visible when compared to what were the other “hot” real estate markets in the country, such as San Francisco (74%) and Seattle (79%).
Home prices got especially out of whack in places such as Dallas, and buyers responded by not buying. This resulted in homes staying on the market for much longer than they had in the recent past, causing uncomfortable feelings and stress in sellers, forcing many to lower the asking price on their homes in order to attract more buyers. When those homes finally sold – if they even have yet – they often sold for a much lower price than the sellers originally asked, and at a much lower price than they would have just a year earlier.
In response to the dropping prices and lengthier stay on the market, builders have stopped building at the same pace they were in the past, as they aren’t keen to enter a market that has low demand and lower prices. If you’re looking for a telltale sign of the where the housing market is headed, look no further than the action of homebuilders.
Low Prices Are a Good Opportunity for Investors
Much of this information and data paints a bleak picture for the outlook of the U.S. housing market. As buyers are digging in and shifting their focus from purchasing a home to potentially renting one – or staying in their current home instead of upgrading – sellers are preparing themselves for what could be a long wait to close the sale of their home, and at a price that might not be ideal.
But as homes sit on the market longer and prices continue to drop, opportunities will continue to increase for real estate investors. This opportunity is two-fold:
- First, and most obvious, longer stays on the market can make sellers panic and drop their prices. Lower home prices mean a cheaper entry point into the market and a lower up-front investment cost.
- Second, downturns in the housing market are often accompanied by increases in the rental market. Higher mortgage rates often convince buyers to rent instead of purchase as they hope rates will drop in the future.
These two factors combine to create a nice opportunity for real estate investors. The entry point in markets such as Dallas is starting to become much more affordable than they were as recently as a year ago, creating a buy-low scenario. More renters on the market provides a good opportunity to create a steady, consistent monthly income on the property instead of having it sit on the market waiting for a buyer.
And, over time, as the housing market inevitably rises again, investors will be in a prime situation to sell their investment, if they so wish, for a profit that could be a lot higher than it would have been if they made their purchase when home prices were at their peak.