While Denton County experienced a solid jump in home sales during the month of September, the city of Denton was not so fortunate, posting a slight decline in closings last month. North Texas home sales are experiencing a nice rebound from the sluggish start to the year, but that doesn’t mean the real estate market is as healthy as some people would have you believe.
While The Dallas Morning News was busy floating another bogus statistic (overstated estimate) for September home closings, the paper failed to clarify that mortgage interest rates were more than 100 basis points lower looking at the year-over-year comparison for September. Dramatically lower mortgage rates saved the proverbial backside of the North Texas real estate market this year. Even with the benefit of lower mortgage rates, the rolling 12-month average for North Texas home sales (actual closings) is still negative according to NTREIS figures.
As I note in my detailed monthly housing market reports, affordability is an important driver to sales. This is why area home sales were faltering as 2018 ended, and why the summer experienced a nice turnaround. People buy payments, not just prices. It is no surprise the housing market responded favorably to mortgage rates that were effectively 22% lower than the same time a year ago. By lowering rates, we simply made an expensive housing market look a little more appealing.
Automobile dealers have figured this out too. With new car prices out of reach for average consumers, 72-month and 84-month financing has helped to make payments look manageable. To keep the credit growth flowing, the full array of financing gimmickry has to be deployed to entice consumers into accepting continually elevated prices.
Home prices in the city of Denton rose slightly last month, and remain near record highs. This is precisely the reason why home sales in Denton are stagnating. A look at the 340 or so homes currently listed for sale in Denton shows a median list price of $300,000 and an average price of $373,848. Only a third of the homes currently on the market in Denton would qualify as “affordable” based on last month’s average closed sales price of $270,719.
Texas A&M University’s chief economist may think record-high home prices in North Texas look “really good” relative to other U.S. metro markets, but that doesn’t correspond to the reality most home buyers face in the current housing market. Bargain basement rates make expensive home prices look better, but “really good” is probably not the phrase buyers are using right now.
According to the Federal Reserve mouthpieces, the U.S. economy is in a “good place.” James Gaines at the Texas A&M Real Estate Center said Dallas-Fort Worth is the most affordable of the top 10 largest U.S. metro markets. Those statements require some context for understanding.
During a one-month stretch beginning this September, the Federal Reserve added $176 billion to its balance sheet (think QE4) to stabilize the floundering overnight repo markets. The Fed’s balance sheet will likely be back above $4 trillion before the year is out, and they have already reduced rates twice this year to keep the markets afloat. As I predicted would happen, the Fed was forced to retreat from its policy normalization effort to avoid a complete market collapse. And boy, have they retreated!
Home prices in the DFW area are still well above historical metrics of affordability like local incomes, so it is ridiculous for Jim Gaines or other economist to compare DFW prices to home prices in San Francisco, New York or elsewhere.
The Texas A&M Real Estate Center produces the Texas Housing Affordability Index (THAI) for various markets throughout the state. It should come as no surprise that virtually every Texas real estate market looks affordable based on their flawed methodology. It is easy to confirm the THAI index is a piece of garbage because the THAI numbers from Q4 2018 were all well above 1.0 for DFW-area markets, indicating more than enough family income to buy the median-priced house in the area.
The lowest index for Denton County in Q4 2018 was 1.32, using the smallest down payment scenario possible. Even under these circumstances, the Real Estate Center’s THAI index said that Denton County home prices were easily affordable. A ratio of 1.0 means the median family income is exactly sufficient to purchase the median-priced home. Any number above 1 means that income exceeds the amount needed.
As a reminder, home sales throughout the North Texas market began tanking last November when mortgage rates were creeping toward 5%. Sales kept falling through January 2019, until it became clear that mortgage rates would come crashing back down. Area home prices were obviously not affordable during the fourth quarter of 2018, not with rates pushing upward of 5%.
Affordability, or the lack of it, is still a challenge for the Denton-area housing market. Federal Reserve officials and local economists can pretend that the economy is in a good place, but the facts point to larger unresolved structural problems. Low rates provide a mask for those problems, but they are not a long-term solution.
Embrace the gift of low mortgage rates for what it is. Super-low mortgage rates have been useful to those looking to refinance, as well as for buyers looking to purchase a home in a challenging real estate market. Just be mindful of what low rates actually mean. Depressed or falling mortgage rates are a signal that economic demand is strained. The Fed wants to prevent the completion of the normal business cycle, but there will come a point when no amount of jawboning or financial engineering will hold market forces at bay.