Dallas, Frisco, and Plano Texas are making headlines these days for booming housing markets, new and incredible mixed-use developments rising up and for the major corporations moving their headquarters in and calling these cities home.  These headlines are individually fantastic but to look at them as a whole would mean one could only calculate a very strong and prosperous area with no worries on its housing front, but is this true?  Are we at our best or headed for a bubble?

When talking about trends and data let’s focus on Plano for a moment.  Below is a graph with live data of new listings of single-family homes in the general Plano area (on a circumferenced map).  What do you observe about this graph when you look at it?  Have you noticed that the four-year trend is nearly the same for new listings every year?

Potential Bubble?

When you look at the Dallas and Frisco graphs, they’re very similar,  Many analysts who are concerned about the Dallas, Plano, Frisco and surround area housing markets and their stability cite what CoreLogic chief economist Frank Nothaft has referred to as “brisk appreciation” in the market based on a booming population and increasingly tight housing inventory.  The key to identifying a potential bubble forming is to determine the source of these factors and others, and then evaluate whether or not the market is actually in any immediate danger.  Strictly by the numbers,  Dallas and surrounding markets do represent a greater risk than some other regional markets simply because they have gone so high so quickly.

Managing Director for Fitch Ratings (one of the big three credit rating agencies), Grant Bailey warned in a new report:

“The Dallas housing market has shown the most significant overheating in the last two years and is now 15 percent to 19 percent overvalued.  Overvalued markets are more likely to experience a slowdown in price growth, or a price correction.”

“Fitch estimates that approximately 17 percent of the country’s home prices are more than 10 percent overvalued,” the report said. “Fast home price growth in some regions — California, Florida, and Texas — appears to be exceeding the supporting economic fundamentals.”

In the event that a sudden economic shift occurs – say, mortgage rates rise dramatically or a main source of employment and population growth dries up – then the Dallas area markets would certainly take a harder hit than one that has been appreciating more slowly and steadily over time. The real question: is that sudden, negative economic shift particularly likely to happen and, if so, when?

Is there a shift coming?

The Dallas-Fort Worth area ranked second in a national forecast of sales and price growth in 2018 by Realtor.com. Sales this year are predicted to growth 6 percent while prices are expected to rise 5.57 percent. Only Las Vegas ranked higher, with sales projected at 4.9 percent and price growth at 6.9 percent.

Growth in price and sales is linked to demand driven by a population boom that has brought about 100,000 newcomers to the Dallas-Fort Worth area during the past few years, according to the U.S. Census Bureau.

The influx, the result of a healthy economy that added 100,400 new jobs to the region in a year, has increased demand for housing at a time when inventory was lagging and builders struggled to deliver quickly.

The result has been home prices that have escalated to record levels. The median sale price for a house in Dallas-Fort Worth rose 6.31 percent from $236,100 in November 2016 to $251,000 in November 2017, according to the latest data from the Texas A&M Real Estate Center.

The median sale price rose 57.8 percent in the past five years, up from $159,000 in November 2012 to $251,000 in November 2017, according to the real estate center.

Sales volume for single-family homes increased 5.51 percent between November 2016 and the same month in 2017. Year-to-date sales through November 2017 reached 93,812 for a value of $28.9 billion.

Despite some fluctuations in the market, demand and sales have continued to climb at a feverish pace for more than two years and show no signs of stopping.

According to Dallas’ own Federal Reserve experts, Texas housing as a whole is powered by a host of advantages over other states, such as a relative

ly low tax burden and, more importantly for investors, a flexible labor market. Flexible labor not only indicates that a market is highly adaptable, which is a positive trait whether a market is flourishing or recovering, but also that the market is characterized by corporations and industries that quickly respond to changes in the economic climate in order to remain profitable and that the labor force is willing and able to freely move between jobs as the economy dictates.

As far as Dallas goes, this flexible characteristic indicates that the threat of a negative economic shift – say, falling oil prices – is mitigated as far as fallout goes because the labor force is highly adaptable and is likely to remain active and engaged despite a downturn in any one given industry. In the case of falling oil prices, that particular example has clearly played out as many economists warned that Texas as a whole and its major metros, in particular, would likely suffer when oil prices fell. While the Dallas Fed predicted this past March that Texas job growth and, by extension, home sales volumes and home prices, would slow over the course of this year in response to falling oil prices, at present, home sales and employment numbers are stronger than they were a year ago when oil prices were hovering around $100 a barrel.

So does this mean that the Dallas housing market is impervious to oil price fluctuations? In an optimistic world, maybe, but successful investors seldom err on the side of optimism. Instead, it would probably be safer to say that falling oil prices have not been felt in the area yet and move on to other indicators that investors and economists are watching. Since population growth depends to a great extent on employment, the jobs market is likely where the first signs of trouble for Dallas will appear, should they do so.

According to the U.S. Bureau of Labor Statistics, Dallas employment has risen 3.7 percent this year so far, well above the national increase of 2.1 percent. In fact, the city ranked first in the country for job growth and third in the number of jobs added (more than 3.3. million in the past 12 months).  We haven’t spoken much about oil in our posts, but we have focused a lot on the how the job market affects the housing market.  The two really live hand in hand.  While investors have to err on the side of caution, one cannot but help and be amazed at how the Dallas area, especially Plano has consistently ranked highest and best on many different national levels.

Interestingly, although oil-sector jobs did decline during that time period as many economists expected, other professions added enough jobs that they counter-balanced the losses. It is noteworthy that manufacturing and information jobs both are on the decline in the area. This could represent a potential problem in coming months since information jobs tend to create many other jobs and the loss of this type of job could affect job growth over time, but the decline likely simply represents a heightened environment of competition rather than a seriously problematic trend since most major metro areas are presently competing for these individuals and Texas, in particular, is a hotbed of competition for these professionals. Over time, however, if the information sector’s population continues to decline in Dallas, the market could certainly soften.  

The final thing real estate investors should watch in the Dallas area is the new-construction trend.  Compared to the national housing boom in the early 2000’s, builders are keeping their cool in Dallas. However, with would-be homeowners camping out, literally, in hopes of bidding high and early on the new homes of their choice, things could spiral out of control quickly. Adding to the potential for overbuilding, apartment renters are getting slammed with record rent increases, which is driving more renters toward homeownership. That is definitely good news for builders and investors today, but keep a close watch on this trend.

The second quarter of 2015 saw new home starts in the Dallas area up nearly 10 percent year-over-year,  many of those homes are priced above the present median home price (around $200,000), an issue which is creating an inventory crunch at the bottom tier of the market and setting up a scenario in which the upper tiers are overstocked and home values could fall.

This is a tricky price point for people who may be selling their home for the first time.  Pricing their home right in order to move up to next-level property is imperative in order to take advantage of the lower mortgage rates before they rise.

The Mortgage Rate Factor

Interest rates have been on the rise and there is no sign of them stopping.  Even a recent respite from rising interest rates turned out to be short-lived as mortgage rates edged up again in Bankrate’s latest weekly survey of national mortgage lenders.

The benchmark 30-year, fixed rate rose to 4.71 percent, up 1 basis point from the previous week, according to Bankrate’s weekly survey of large mortgage lenders for the week ending June 27. A year ago, the rate was 4.07 percent.

Meanwhile, mortgage applications fell 4.9 percent for the week after rallying the previous week. Refinance applications reversed course from a week earlier, falling 4 percent, the MBA reported. Purchase applications decreased 6 percent.

Mortgage Rates This Week

The benchmark 30-year fixed-rate mortgage rose this week to 4.71 percent from 4.70 percent, according to Bankrate’s weekly survey of large lenders.  A year ago, it was 4.07 percent. Four weeks ago, the rate was 4.64 percent.  The 30-year fixed-rate average for this week is 0.09 percentage points below the 52-week high of 4.80 percent and is 0.76 percentage points greater than the 52-week low of 3.95 percent.

The 30-year fixed mortgages in this week’s survey had an average total of 0.31 discount and origination points.

Over the past 52 weeks, the 30-year fixed has averaged 4.31 percent. This week’s rate is 0.40 percentage points higher than the 52-week average.

• The 15-year fixed-rate mortgage fell to 4.13 percent from 4.15 percent.
• The 5/1 adjustable-rate mortgage was flat at 4.12 percent.
• The 30-year fixed-rate jumbo mortgage fell to 4.62 percent from 4.63 percent.

At the current 30-year fixed rate, you’ll pay $519.24 each month for every $100,000 you borrow, up from $518.64 last week.

At the current 15-year fixed rate, you’ll pay $746.22 each month for every $100,000 you borrow, down from $747.23 last week.

At the current 5/1 ARM rate, you’ll pay $484.36 each month for every $100,000 you borrow, unchanged from last week.

Results of Bankrate.com’s weekly national survey of large lenders conducted and the effect on monthly payments for a $165,000 loan:

Weekly national mortgage survey

Breakdown	30-year fixed	15-year fixed	5-year ARM
This week’s rate:	4.71%	4.13%	4.12%
Change from last week:	+0.01	-0.02	N/C
Monthly payment:	$856.74	$1,231.26	$799.19
Change from last week:	+$0.99	-$1.66	N/C

 

Summation

The Dallas Fort-Worth Area housing market is in a pretty healthy condition, so far.  We’re on the right course to stay that way as long as certain factors adjust slightly in our favor.  There are some of these factors that are under our control and some that aren’t.

Last week, CoreLogic analysts warned that over the next few years the housing market in Dallas could become unsustainable thanks to rising home prices and the increasingly-large amounts of monthly income that homeowners in the area must dedicate to their mortgage payments. However, the same analysts noted that the CoreLogic Home Price Index indicates that on average, Dallas homes will be “fairly valued” through the end of 2017. T

Therefore, as long as a Dallas investor watches the market closely for signs of softening and is careful to prepare multiple exit strategies for each deal, that individual should be able to turn a nice real estate investing profit in the Dallas market for some time to come. It would be a shame to forego thriving in such a dynamic and diverse housing market out of fear of a bubble that is likely to materialize slowly or perhaps not at all.

The biggest factor that will work against you personally, however, isn’t the market, it’s stalling.  Stalling can cause you to lose the equity you thought you had in your home or get your priced out of the neighborhood you thought you get into when mortgage rates rise.  Knowing your target time-frame is key to your success as a home buyer, seller or investor.

That’s a personal conversation, however, and one we’d be happy to have with you.  Contact us to set up a time and learn how timing could save you tens of thousands of dollars.

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