Texas housing sales increased 1 percent in August, reaching a record-breaking 30,421 homes sold through a Multiple Listing Service (MLS). Falling interest rates continued to support mortgage applications for home purchases and refinances. Texas homes averaged 59 days on the market, corroborating healthy demand. On the supply side, inventories remained constrained, especially in the entry-level market. Accelerated single-family permit issuance indicates a favorable outlook on inventories; single-family construction values, housing starts, and loan values, however, stagnated. Meanwhile, multifamily loan values and starts increased as builders moved to offer more affordable options. Housing affordability continues to challenge the Texas home market, but the extended national and state economic expansion bodes well for housing demand.

Supply*

The Texas Residential Construction Cycle (Coincident) Index, which measures current construction activity, flattened as industry employment growth slowed and construction values stalled. The Residential Construction Leading Index, however, rose to its highest level since the Great Recession amid falling interest rates and upward-trending building permits. This suggests higher levels of construction in the coming months.

Second-quarter private bank loan data revealed an improvement in the multifamily sector amid a rise in apartment-building construction. Loan values for multifamily properties increased 5.9 percent quarter over quarter (QOQ) after falling the last three quarters of 2018. One-to-four unit investment, however, cooled after jumping 4.3 percent QOQ in 1Q19.

Single-family construction permits increased for the second straight month, registering 6.3 percent year-over-year (YOY) growth. Permit activity through August, however, remained 3 percent below levels in the first eight months of 2018. Texas' 11,545 monthly permits (nonseasonally adjusted) accounted for 17 percent of the U.S. total. The Lone Star State led the nation in total permits but ranked seventh in per capita issuance behind Arizona and Florida. On the metropolitan level, Houston topped the list for the tenth consecutive month with 3,674 permits in August. DFW issued 3,328 permits, increasing after permit activity fell in the first half of the year. Central Texas extended a seven-month upward trend, issuing 1,820 and 891 permits in Austin and San Antonio, respectively.

Total Texas housing starts increased 9.3 percent year to date (YTD) as the multifamily sector corrected upward after a slow start to summer. Consistent with dampened loan values, single-family starts remained stagnant while single-family private construction values perpetuated a yearlong trend of decline. San Antonio was the bright spot where data revisions revealed an upward trend. Construction values may rise in the upcoming months if permit issuance continues to accelerate.

Two straight upticks in sales paired with dwindling supply pulled Texas' months of inventory (MOI) to the lowest level this year at 3.6 months. A total MOI around six months is considered a balanced housing market. The MOI for homes priced less than $300,000, which comprised nearly two-thirds of sales, ticked below 2.8 months. Inventory for luxury homes (those priced more than $500,000), however, reached an MOI of 8.7 months. These divergent trends exemplify the shortage of affordable housing and the current mismatch between demand and supply.

The MOI decreased across the major metros. Austin inventories extended a steep decline, sliding to 2.3 months after reaching a six-year high of 2.8 months in January. Dallas' metric fell below 3.2 months as the influx of new listings pulled back in the mid-price range ($200,000-$400,000). After improvement in the first half of the year, San Antonio's MOI fell back down to year-end levels at 3.5 months. Fort Worth inventories showed signs of tapering its downward trend as homes priced $200,000-$300,000 sold at a slower pace than in 2018, but supply of active listings remained low at 2.5 months. Only Houston posted an MOI above the statewide average at 3.9 months.

Demand

Total housing sales ticked up 1 percent in August after data revisions and business-day adjustments brought July's increase of 17 percent down to 3 percent. Despite the correction, sales extended a steady trend upwards, albeit at a slower pace than during the first three months of the year. Transactions for homes priced $200,000-$300,000 accounted for most of the uptick, increasing 5.5 percent after tepid second-quarter growth.

Growth in Fort Worth and San Antonio's $200,000-$300,000 market supported the statewide trend. Fort Worth's total sales increased 2.9 percent after a five-month stagnation in the aforementioned price cohort. San Antonio exceeded 3,000 monthly sales for the first time in series history. Houston activity hovered at a record 7,800 sales reached in July. Austin and Dallas sales registered six percent below December 2017 all-time highs but increased 8.0 and 8.4 percent YOY, respectively.

Robust demand held Texas' average days on market (DOM) at 59 days. The DOM in Houston and San Antonio stabilized at 59 and 60 days, respectively. Austin's DOM hovered at 57 days, two days less than the metric's yearlong average. The DOM in North Texas continued to adjust after reaching unsustainable levels in 2016-2017, registering 56 and 45 days in Dallas and Fort Worth, respectively.

Continued concerns about global economic growth and trade uncertainty pulled interest rates down for the tenth consecutive month. Long-term rates remained lower than those for short-term instruments, inverting the yield curve and sustaining talks of a recession. Economic fundamentals at the state and national level, however, are healthy and stable. Interest rates could fall further following the Federal Reserve's second rate cut of the year in September. The ten-year U.S. Treasury bond yield fell 40 basis points to a three-year low of 1.6 percent, while the Federal Home Loan Mortgage Corporation's 30-year fixed-rate inched down to 3.6 percent. Texans capitalized on lower rates, pushing mortgage applications for home purchases up 21.6 percent YTD. Refinance mortgage applications, which are more sensitive to interest rate fluctuations, have more than doubled since year end.

Prices

The Texas median home price increased for the third consecutive month, surpassing $241,400 for an annual growth rate of 4.3 percent. Austin led the state with a record-breaking median price of $315,500, followed by Dallas at $293,600. After a brief reprieve in July, the metric increased to $244,600 and $243,800 in Houston and Fort Worth, respectively. San Antonio lagged the other metros, sinking $1,300 to $230,300.

The Texas Repeat Sales Home Price Index increased 3.3 percent YOY, moderating in comparison to year-ago levels. Appreciation, however, continued to outpace wage growth, exacerbating affordability struggles. On the metropolitan level, Houston and North Texas largely contributed to the slowing trend as the indices extended a steady decline. Houston's metric decelerated to 1.8 percent YOY while Dallas and Fort Worth posted 2.6 and 4.0 percent growth, respectively. In Central Texas, the indices increased 4.3 and 4.5 percent YOY in Austin and San Antonio, respectively.

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*All monthly measurements are calculated using seasonally adjusted data, and percentage changes are calculated month over month, unless stated otherwise.

Reference: Texas Housing Insight by James P. Gaines, Luis B. Torres, Wesley Miller, and Paige Silva (Oct 4, 2019)

https://www.recenter.tamu.edu/articles/technical-report/Texas-Housing-Insight