THE LOCATION STRATEGY TOP 10

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It’s come to my attention that one of our competitors is hosting some sort of pledge drive next month.  At Location Strategy, we’re about helping our clients understand the market for their products and developing strategies for the future, and we don’t ask for anything for an initial consultation with you besides your time.   I’d offer you a tote bag, but we’re fresh out.   Maybe one of the Californians will have one for you.

MARK YOUR CALENDAR

Scott Davis will be speaking at the North Houston Counties Builder Association meeting on December 7.  We’ll post the link as soon as it available.   This will be your only chance this fall to hear Scott’s public presentation on the state of the market.

WHY DOES IT SEEM LIKE THE EXISITING MARKET ISN’T SLOWING DOWN?



The short answer is it is.  We’ve included existing-only sales in the graph below, using a trailing twelve-month total.   Existing sales peaked in January – before interest rate rises began.

Part of the reason it seems like it hasn't is that days on market have remained historically low and only barely nudged upward. The graph below shows existing days on market and its 10 year average. Existing days on market have remained historically low – and still would have to increase by almost 50% to reach its 10 year average.

Another reason is that the COVID-policy distortion in the existing market was smaller than in the new home market.  The chart below shows new listings – those added in the current month --  in MLS in both the existing and new home markets.   New listings in existing homes follow an upward sloping trend with a very distinct seasonal pattern.  There was some distortion around 2020 which may even have been as a result of COVID hysteria – people reluctant to have strangers in their homes kept them off the market – whereas economic situations would have argued for more properties being listed.  New homes (orange) come to the market in a different seasonal pattern but as listings of existing properties surged, new homes flattened.  This reflected the historic decline in co-op sales in 2021, only to see new homes shoot up dramatically this year.

What does this mean?  Existing inventory saw fewer distortions from COVID-related policies than new homes did, particularly as the pricing spread between new and existing homes narrowed. Buyers sought to purchase new homes – creating a feedback loop that has now caused a dramatic increase in inventory in new homes and relatively little change in the existing market as of yet.  As this market slows down, I would expect to see some fairly sharp declines in price, but on very low volume.

 NO ONE LEFT TO REFINANCE

Potential sellers have to have some reason or incentive to sell.  Often that is a family or work issue, or perhaps a financial issue.   One thing that is unlikely to be a financial issue for some time is the mortgage. Morgan Stanley has discovered that there are basically zero mortgages that are 25 basis points or higher than current mortgage rates. Most are 200-300 basis points below current mortgage rates.  Yes, current rates are a challenge getting buyers qualified.  BUT that also means potential sellers in the existing market will be reluctant to sell – creating a lock-in effect for used homes that should make new housing the default option.

CROSSTOWN TRAFFIC DOESN'T GET ME TO YOU



The current mortgage and affordability situation has caused new home sales traffic to plummet almost to pandemic levels. 

NO “PLUNGE PROTECTION TEAM” FOR HOUSING

Since national house prices increased very quickly during the pandemic - up over 40% - it seems likely that some of the usual “stickiness” will not apply. I think the most likely scenario now is nominal house prices declining 10% or more from the peak, and real house prices declining 25% or so over the next several years.  This suggests some significant double digit regional price declines in some markets, but not likely for Houston.  I don’t expect cascading price declines this time since lending standards have been reasonably solid (and we won’t see a huge surge in distressed sales). During the housing bust, nominal prices fell 62% in Las Vegas, 56% in Phoenix, and 51% in Miami - I don’t expect anything close to that level of price decline this time.  The good news for the homebuilders is housing starts and new home sales will likely bottom much earlier than real house prices (that is the usual pattern).

Capital Economics also expects home prices to drop 8% on a year-over-year basis (year-over-year housing price declines are unusual).

When we see price declines in the new home market, they will have to come from somewhere besides the house.  The average new home in Houston has declined almost 35% in square footage since 2014.  It is more likely that pricing pressure will be applied to land than to improvements in this cycle.

DEMOGRAPHICS WILL SHORTEN THE BUST

Construction of new homes has not kept up with the formation of new households for the past 15 years, limiting the market downside.

This factor by itself should create strong demand for new homes but there’s another underlying factor, and it a tsunami.  The chart below shows the longer term trend for three key age groups: 20 to 29, 25 to 34, and 30 to 39 (the groups overlap).  We can see the surge in the 20 to 29 age group last decade (red). Once this group exceeded the peak in earlier periods, there was an increase in apartment construction. This age group peaked in 2018 / 2019 (until the 2030s), and the 25 to 34 age group (orange, dashed) will peak around 2023. The 30 to 39 age group (blue) is important for buying and will be increasing over this decade.    The current demographics are now very favorable for home buying - and will remain positive for most of the decade.  For Houston, the annual number of 30-39 years will range between 1.2 and 1.6 million, roughly 15-20% of the region's total population. 

It’s very likely that we will have gone through the virtual decimation of our industry at the hands of the Fed to control home price inflation, only to have exactly the same factors driving home prices higher reappear as soon as we emerge from any likely recession.   That’s one more reason why “I’m here from the government and I’m here to help you” remain the scariest words in the English language.

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