Consumers have not stopped wanting to buy, but the pricing ceiling may have been reached
By ALI WOLF
Prices appear to have hit a ceiling in some of the nation’s top housing markets. Given the changing housing dynamics, we thought it was time to dust off our peak pricing graph (below) to put things in perspective. Meyers Research’s Director of Economic Research, Ali Wolf, explores trends related to the price growth since the previous peak.
The graph shows the change in prices from the previous peak to the previous trough (the gray), and the difference between the previous peak to today’s pricing (blue). The appreciation across the country has been great for existing homeowners (disproportionately Baby Boomers and Gen X-ers), but with rising rates (the 10-year Treasury yield hit the highest level since 2010 in early October) and consistently low supply, the market has been tough for first-time buyers and those looking to move.
Most of the markets that saw extreme price drops during the Great Recession have either fully recovered or are just below previous peak levels. Given today’s pricing, the percent of households that can afford the median-priced new home in markets like Las Vegas (29 percent currently), Riverside (27 percent), and Orlando (37 percent) is still higher than in 2006.
The housing markets in places like Denver, Dallas, and Charlotte experienced a relatively small drop in home prices during the Great Recession (they also did not have a big run- up), but are now up 30+ percent since the peak. The affordability ratio for these markets ranges from 31 percent to 46 percent, which may sound good by LA or Seattle standards, but is relatively low for the given markets.
When prices were at the peak during the last cycle, lending was also incredibly loose. That makes it difficult to analyze affordability apples to apples. In some markets, the affordability ratio is in-line with mid-2000 levels, but the actual affordability is different today than back then.
We use existing home prices to view overall trends given the larger sample size, but the same problems persist in the new home space. To adjust for affordability headwinds, builders are offering some incentives*. To be clear, incentives are in the marketplace, but they are not pervasive. We connected with our experts from California to Florida to gain their boots-on-the-ground insight. The consensus was, there are some incentives, but it’s very specific to certain communities, for certain lots, at certain price points. The effectiveness of the incentives generally seems positive. Some of our clients dropped prices, which resulted in a boost in sales suggesting a price ceiling versus a change in mindset from consumers.
When we talk about incentives, we need to remove the robustness of 2017’s housing market from our recent memory and remember that they are normal this time of year because of both seasonality and fiscal year-ends for builders; four publicly traded builders had year-end between September 30th and October 31st and another two have it November 30th
UNPRECEDENTED AFFORDABILITY IN DALLAS
As seen in the graph below, of the markets most above the previous peak, Dallas is one that looks unlike itself pre-2010. During the last housing cycle, affordability statistics showed 50% of households could afford the median-priced new home in Dallas; today,
it’s 45%. Dallas’ heat over the past couple of years has cooled as prices hit the consumers’ pocketbooks. When we say cooled, year-to- date contracts in Zonda through July rose 23% from 2016 to 2017, but grew just 5% over the same period from 2017 to 2018. Looking at the higher price points in the market, inventory is starting to face some pressure. We would not be surprised to see some discounting and incentives by year-end in the market.
“The regulatory environment in Dallas
has restricted builders’ ability to deliver smaller lots in a way that it hasn’t in other Texas markets. We are seeing more interest in attached product in Dallas, particularly in master planned communities, in response to affordability” explained Scott Davis, Meyers Research’s Senior Vice President of Advisory.
The problems hitting Dallas, however, are a function of the success. The market has attracted interest from corporations relocating either their headquarters or a satellite office and housing demand is fueled by in-migration and strong labor conditions.