Is There Light At The End of Austin’s Real Estate Tunnel?
Did you enjoy the fireworks on the 4th? We stayed home with our retriever and oohed and aahed from the back porch. While hounds howled from a distance with every loud burst, Lily watched for falling Mallards. In her canine world, it must be hunting season.
Historically, in the Austin/Georgetown real estate market, July brings rocket celebrations for buyers and sellers. In 2024, the real estate heavens offered little but the faint light of distant stars. In the night of summer, many industry insiders predict light at tunnel’s end. Real estate bears chime, “It’s a train.” Real estate bulls claim “A new day is dawning.” Who do you think is right?
Let’s start with Austin’s real estate statistics from May (June has not yet been published) provided by the Austin Board of Realtors.
Summary:
1) The median price for houses coming to market is up 4.7%. New sellers are optimistically listing with higher expectations.
2) The number of houses sold compared to a year ago is down 18%.
3) There are now 5.6 months of housing inventory - typically indicating a buyer’s market. In May, 2,611 new units joined the Multiple Listing Service. The number of homes now on the market compared to a year ago is up 46.9%, and the average time on market is now nearly two months.
4) Pending sales are down 9.5% from a year ago. The average close to list price now comes in at 95.1%, which means that the median-priced $555,000 home sold for $527,250. In other words, sellers are flexing on price but there is no sign of panic.
What might this mean?
To the real estate bear, “I hear a train a-comin.’”
First, let’s examine New Home Sales. New construction sales report for May declined 11.3%. Bloomberg data projected 633,000 units would be sold, compared to the 619,000 closed contracts nationwide. Meanwhile, new home prices hit record highs. Lower sales plus elevated prices created the highest month-end new home inventory since 2008. Lisa Sturtevant, Bright MLS chief economist remarked in a June 26, 2024, Yahoo! Finance Report, “Homebuilders had been enticing buyers with rate buydowns and other concessions, but for some homebuyers, these financial incentives are no longer enough to get them on the building lot.”
Second, let’s examine a bearish viewpoint based on reports like this one published by the Federal Reserve Bank of Cleveland. Allow me to quote the introduction. “There have been two US house-price booms in the 21st century. The first, which occurred from about 2000 to 2006, preceded the Great Recession and was followed by a substantial fall in house prices and a spike in foreclosure rates. The second started during the COVID-19 pandemic, with annual house-price growth exceeding that of the 2000s boom.” If one pauses here, it is easy to conclude, “Well, since the house-price growth of the 2020s exceeded the 2000-2006 metrics, then the outcome will surpass the previous boom: housing prices will collapse and foreclosures will flood the market leading to a second ‘Great Recession.’” However, does the report actually reach this conclusion? No. It is far more nuanced. But that does not prevent perma-bears from forming such a conclusion. It is best to read the entire presentation provided here.
Thirdly, it is easy to remain pessimistic when Fannie Mae, a leading provider of mortgage financing in the U.S. housing market, reported in a June 7, 2024 survey, “Citing unaffordability, 86% of consumers say it’s a bad time to buy a home.”
To the real estate bull, “A new day is dawning.”
“Why in the world would anybody be so delusional,” a bear might quip. And the bull? She might quote from the same Lisa Sturtevant in Yahoo! Finance report from June 26. "With more housing inventory and softening demand, expect the third quarter of 2024 to be a slower new housing market than the second half of 2023. However, while new home inventory is back at 2008 levels, other fundamentals in the market are significantly different than they were 16 years ago. The job market is strong, there is still pent-up demand among millennials, and for all the increase in inventory, overall supply is still below pre-pandemic levels," she added.
Second, while flagging consumer sentiment is a reality, one missing element from many prognosticators is a basic premise from Economics 101: the law of supply and demand. Supply remains painfully low while demand is structurally positioned to grow. The last time new U.S. home builders constructed two million units, we must time travel back to 2005. Then, the nation’s population stood at 296 million. Since then, we have added 30 million more people. Simultaneously, we are building one million fewer housing units per year. Exacerbating the pent-up demand, during the decade following the Great Recession, builders only constructed 500,000 homes a year. Meanwhile, demand for homeownership is mounting. For instance, there are 71 million millennials, the largest U.S. demographic, arriving at the typical home-buying years.
Thirdly, interest rates may be coming down. Why? While mortgage rates are not solely factored by the interest rates set by the FOMC (The Federal Open Market Committee - which is the Federal Reserve’s chief body for monetary policy), they are certainly influenced by them. For this reason, consider two events from this last week.
1) On Tuesday, July 2, FOMC Chairman Powell stated that the US economy has made “quite a bit of progress back towards the 2% inflation target, while also that the flagging economy is back on a disinflationary path.”
2) On Friday, the government released its monthly nonfarm payroll report. The headlines did not contain the surprise credited to a robust day in the stock and bond markets. Instead, the upward impetus was embedded within the report, a revision of the April and May employment numbers. Instead of adding 165,000 jobs in April, there was only an increase of 108,000. Likewise in May, instead of 272,000 new jobs filled, only 218,000 were added (to understand the impact of May’s report, check out this previous blog). Why does this matter? The Federal Reserve holds two mandates: 1) targeting inflation at 2%; and 2) sustaining a robust labor market. In the quest to tame inflation by keeping interest rates high, should the labor market weaken, the Federal Reserve will strongly consider lowering interest rates to stimulate the economy. Therefore, April and May’s revision pointed to a softer labor market.
What other impact did Friday’s nonfarm report have? The CME FedWatch Tool, which provides the latest probabilities of FOMC rate moves, projected a 92.2% likelihood of rates remaining at 5.25 to 5.50%. In September, the probability of a quarter-point decrease rose to 72% By the end of the year, the target rate probabilities rose to include two rate cuts in 2024.
