Have you seen The Big Short, Hollywood’s offbeat take on a group of rebellious investors who discover that the nation’s housing boom is really an illusion? It’s enough to make you suspicious of a good thing, such as the notion that Dallas-Fort Worth has one of the nation’s hottest housing markets.
Area home prices hit record levels in 2015, with the median sale price rising about 10 percent across North Texas. Housing starts grew by 20 percent, third-most in the nation, and home sales hit their highest level in recent years, though still short of 2006, during the doomed boom.
Now that oil prices have collapsed, some wonder whether the DFW market is set for a fall. In a January report, Arch Mortgage Insurance listed Dallas-Plano-Irving and Fort Worth-Arlington among five metro areas in the U.S. with the highest risks of home-price declines. The others are Houston-The Woodlands-Sugarland (with the highest risk, deemed elevated); Austin-Round Rock; and San Antonio-New Braunfels.
Dr. Ralph DeFranco, director of risk analytics at Arch, estimates that Dallas-area home prices are overvalued by 20 to 25 percent, based on the historic average ratio of home prices to per-capita income. But he doesn’t foresee a bust. Dallas and Texas as a whole are better positioned than other energy-patch states to handle the decline in oil prices.
“I expect a slowdown from the hot market of recent years, but no outright decline in home prices in Dallas-Fort Worth, even if oil stays at rock-bottom prices,” DeFranco says. “Sales will likely slow down for a year or two.”
That’s also the assessment of Jim Gaines, chief economist at the Texas A&M Real Estate Center, one of the state’s foremost authorities on housing. Gaines expects slower growth in home sales and prices in 2016, which he says will be “a transition year for Texas” following several years of extraordinary growth in jobs, GDP, and price appreciation.
Since 2011, he says, both the state and the region have surged ahead, fueled by the oil industry as well as population and business relocations. Economic growth topped 4 percent a year, job growth was over 3 percent, and home prices expanded by double digits. Some markets saw outsized gains last year, such as 22 percent in The Colony, 29 percent in southeast Dallas, and 23 percent in Richardson. This year, with the energy industry contracting, Gaines expects to see growth in statewide GDP of less than 1 percent, and home price gains could halve.
“The feeling of a boom economy is going to leave,” he says. “The question is not that we’re going to slow down and possibly decline; it’s a matter of what rate and what timing.” But neither Gaines nor DeFranco expect a repeat of the last housing crisis of the 1980s, when a collapse of oil prices cratered the local real estate market. There are serious differences.
“A widespread housing bust is not in the cards, unless there is a new widespread economic calamity,” DeFranco says. “Economic conditions are far stronger now.”
Despite the turbulent stock market, few are predicting a recession. The National Association of Homebuilders expects the U.S. economy to pick up a bit from 2015, and home construction to grow by 18 percent. Housing inventory, stunted by tighter regulations on development loans as part of the Dodd-Frank financial-reform act, stood at less than a two months’ supply at year-end—essentially very little, Gaines says.
“I think we’re going to increase at a decreasing rate,” he says. “You can’t have housing prices going up 10, 11, 12 percent every year and even want it to continue because you know you’re creating the potential for a bubble.”
In a memorable scene from The Big Short, Steve Carell’s character becomes convinced there’s a housing bubble after a stripper tells him she has five homes and a condo. This time around, forces of supply and demand appear to be behind our rising home prices, not wild speculation and fraud. Still, let’s not forget this lesson: When it comes to housing prices, what goes up can come down.