Is Something Wrong with Texas Home Prices?

Is Something Wrong with Texas Home Prices? Finding Shelter: Affordability Squeeze in a Tight Texas Housing Market Dallas Federal Reserve February 23, 2018

Constrained supply plus strong demand = accelerated price gains United States Texas Austin Round Rock Dallas Plano Irving Fort Worth Arlington Houston The Woodlands Sugar Land San Antonio New Braunfels House Price Index (Index 1Q2007=100) 180 170 160 150 140 130 120 110 100 90 80 I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III 70 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Note: Seasonally adjusted. Sources: Federal Housing Finance Agency and Real Estate Center at Texas A&M University.

Since 2012, Texas housing prices have been rising faster than incomes Ratio Texas Personal Disposable Income Per Capita to House Prices (Index 1Q1975=100) Sources: Federal Housing Finance Agency (FHFA), U.S.Bureau of Economic Analysis, and author s calculations. 450 400 350 300 250 200 150 100 50 2016 Q2 2017 Q3 1975 Q1 1976 Q2 1977 Q3 1978 Q4 1980 Q1 1981 Q2 1982 Q3 1983 Q4 1985 Q1 1986 Q2 1987 Q3 1988 Q4 1990 Q1 1991 Q2 1992 Q3 1993 Q4 1995 Q1 1996 Q2 1997 Q3 1998 Q4 2000 Q1 2001 Q2 2002 Q3 2003 Q4 2005 Q1 2006 Q2 2007 Q3 2008 Q4 2010 Q1 2011 Q2 2012 Q3 2013 Q4 2015 Q1

Fundamentals influence price movements in housing markets Supply side: Building permits Housing starts Land costs Construction costs Regulation Demand side: Demographics Income growth Employment growth Interest rates Locational characteristics (schools, work centers, and transportation)

Comparing estimated values to actual prices might show price misalignments The Federal Housing Finance Agency (FHFA) house price index. Methodology used by Case Shiller (2003) applied to Texas and major MSAs (Austin, Dallas Fort Worth, Houston, and San Antonio). Methodology was one of first to point out formation of a housing bubble in U.S. housing market.

Estimates confirm Case-Shiller results from 1Q2004 to 2Q2011 leading to housing boom and subsequent bust Case Shiller U.S Home Price Estimates (Index 1Q1975=100) U.S.: Actual FHFA Price Index U.S.: Estimated value FHFA Price Index Sources: Federal Housing Finance Agency (FHFA), U.S.Bureau of Economic Analysis, and author s calculations. 450 400 350 300 250 200 150 100 50 0 1975 Q1 1976 Q2 1977 Q3 1978 Q4 1980 Q1 1981 Q2 1982 Q3 1983 Q4 1985 Q1 1986 Q2 1987 Q3 1988 Q4 1990 Q1 1991 Q2 1992 Q3 1993 Q4 1995 Q1 1996 Q2 1997 Q3 1998 Q4 2000 Q1 2001 Q2 2002 Q3 2003 Q4 2005 Q1 2006 Q2 2007 Q3 2008 Q4 2010 Q1 2011 Q2 2012 Q3 2013 Q4 2015 Q1 2016 Q2 2017 Q3

Misalignment since 1Q2015 suggests recent price changes cannot be explained by Supply and Demand Case Shiller Texas Home Price Estimates (Index 1Q1975=100) Texas: Actual FHFA Price Index Texas: Estimated value FHFA Price Index Sources: Federal Housing Finance Agency (FHFA), U.S.Bureau of Economic Analysis, and author s calculations. 350 300 250 200 150 100 50 0 2015 Q1 2016 Q2 2017 Q3 1975 Q1 1976 Q2 1977 Q3 1978 Q4 1980 Q1 1981 Q2 1982 Q3 1983 Q4 1985 Q1 1986 Q2 1987 Q3 1988 Q4 1990 Q1 1991 Q2 1992 Q3 1993 Q4 1995 Q1 1996 Q2 1997 Q3 1998 Q4 2000 Q1 2001 Q2 2002 Q3 2003 Q4 2005 Q1 2006 Q2 2007 Q3 2008 Q4 2010 Q1 2011 Q2 2012 Q3 2013 Q4

Same misalignment observed in Austin since 2Q2014... Case Shiller Austin Home Price Estimates (Index 1Q1975=100) Austin: Actual FHFA Price Index Austin: Estimated value FHFA Price Index Sources: Federal Housing Finance Agency (FHFA), U.S.Bureau of Economic Analysis, and author s calculations. 350 300 250 200 150 100 50 0 1990 Q1 1990 Q4 1991 Q3 1992 Q2 1993 Q1 1993 Q4 1994 Q3 1995 Q2 1996 Q1 1996 Q4 1997 Q3 1998 Q2 1999 Q1 1999 Q4 2000 Q3 2001 Q2 2002 Q1 2002 Q4 2003 Q3 2004 Q2 2005 Q1 2005 Q4 2006 Q3 2007 Q2 2008 Q1 2008 Q4 2009 Q3 2010 Q2 2011 Q1 2011 Q4 2012 Q3 2013 Q2 2014 Q1 2014 Q4 2015 Q3 2016 Q2 2017 Q1

... in DFW since 1Q2014 Case Shiller DFW Home Price Estimates (Index 1Q1975=100) DFW: Actual FHFA Price Index DFW: Estimated value FHFA Price Index Sources: Federal Housing Finance Agency (FHFA), U.S.Bureau of Economic Analysis, and author s calculations. 300 250 200 150 100 50 0 1990 Q1 1990 Q4 1991 Q3 1992 Q2 1993 Q1 1993 Q4 1994 Q3 1995 Q2 1996 Q1 1996 Q4 1997 Q3 1998 Q2 1999 Q1 1999 Q4 2000 Q3 2001 Q2 2002 Q1 2002 Q4 2003 Q3 2004 Q2 2005 Q1 2005 Q4 2006 Q3 2007 Q2 2008 Q1 2008 Q4 2009 Q3 2010 Q2 2011 Q1 2011 Q4 2012 Q3 2013 Q2 2014 Q1 2014 Q4 2015 Q3 2016 Q2 2017 Q1

... in Houston since 4Q2014 Case Shiller Houston Home Price Estimates (Index 1Q1975=100) Houston: Actual FHFA Price Index Houston: Estimated value FHFA Price Index Sources: Federal Housing Finance Agency (FHFA), U.S.Bureau of Economic Analysis, and author s calculations. 300 250 200 150 100 50 0 1990 Q1 1990 Q4 1991 Q3 1992 Q2 1993 Q1 1993 Q4 1994 Q3 1995 Q2 1996 Q1 1996 Q4 1997 Q3 1998 Q2 1999 Q1 1999 Q4 2000 Q3 2001 Q2 2002 Q1 2002 Q4 2003 Q3 2004 Q2 2005 Q1 2005 Q4 2006 Q3 2007 Q2 2008 Q1 2008 Q4 2009 Q3 2010 Q2 2011 Q1 2011 Q4 2012 Q3 2013 Q2 2014 Q1 2014 Q4 2015 Q3 2016 Q2 2017 Q1

... in San Antonio since 2Q2015 Possible overvaluation of home prices at state and MSA levels Case Shiller San Antonio Home Price Estimates (Index 1Q1975=100) San Antonio: Actual FHFA Price Index San Antonio: Estimated value FHFA Price Index 250 200 150 100 50 0 1990 Q1 1990 Q4 1991 Q3 1992 Q2 1993 Q1 1993 Q4 1994 Q3 1995 Q2 1996 Q1 1996 Q4 1997 Q3 1998 Q2 1999 Q1 1999 Q4 2000 Q3 2001 Q2 2002 Q1 2002 Q4 2003 Q3 2004 Q2 2005 Q1 2005 Q4 2006 Q3 2007 Q2 2008 Q1 2008 Q4 2009 Q3 2010 Q2 2011 Q1 2011 Q4 2012 Q3 2013 Q2 2014 Q1 2014 Q4 2015 Q3 2016 Q2 2017 Q1 Sources: Federal Housing Finance Agency (FHFA), U.S.Bureau of Economic Analysis, and author s calculations.

Housing starts represent supply fundamentals Are they capturing the supply constraints faced by homebuilder? In aftermath of 2008 09 Great Recession, housing supply held back by lack of developed land resulting in upward pressures on land costs for homebuilders. Other constraints: high costs of labor and materials reduced profit margins incentive to construct homes priced more than $300,000.

Single-family construction has not recovered causing low inventories Texas Single Family Permits Per Capita and Months of Inventory (Index Jan2005=100, Months) 180 160 Permits Per Capita (Left Axis) Months of Inventory (Right Axis) 9 8 140 120 7 100 6 80 5 60 40 4 20 3 Jan 05 Aug 05 Mar 06 Oct 06 May 07 Dec 07 Jul 08 Feb 09 Sep 09 Apr 10 Nov 10 Jun 11 Jan 12 Aug 12 Mar 13 Oct 13 May 14 Dec 14 Jul 15 Feb 16 Sep 16 Apr 17 Nov 17 Note: Seasonally adjusted and detrended. Source: Bureau of Economic Analysis and Real Estate Center at Texas A&M University.

Months of inventory for housing: less than $250,000, at historical lows Texas Months of Inventory by Price Cohort (Months) $0 $199,000 $200,000 $299,999 $300,000 $399,999 $400,000 $499,99 $500,000+ 16 14 12 10 8 6 4 2 Jan 11 Apr 11 Jul 11 Oct 11 Jan 12 Apr 12 Jul 12 Oct 12 Jan 13 Apr 13 Jul 13 Oct 13 Jan 14 Apr 14 Jul 14 Oct 14 Jan 15 Apr 15 Jul 15 Oct 15 Jan 16 Apr 16 Jul 16 Oct 16 Jan 17 Apr 17 Jul 17 Oct 17 Note: Seasonally adjusted and detrended. Source: Real Estate Center at Texas A&M University.

Identifying home price misalignments: not easy and even more difficult bubbles No sure way of knowing what prices should be No single methodology offers complete confidence. No certainty to say home prices overvalued or undervalued or if price bubble is forming. Various methodologies can be used to complement each other.

Evidence regarding Texas' 25 MSAs record episodes of explosive behavior" in house price

Map indicates a misalignment in North Texas home prices relative to their fundamental-based normative values.

During U.S. housing bubble, homebuyers motivated to invest by strong expectations in future price changes Homebuyers generally perceived little risk of a possible fall in housing prices. Emotional, casual word of mouth factors played important roles in home purchasing decision. These conditions difficult to measure and based on feedback and comments of housing market participants.

Purchasing home for investment purposes, perceived little risk of falling home prices, etc. Seem not to be present currently in Texas housing market or in major Texas MSAs. At same time, market did not face a significant supply constraint causing sale inventory levels to fall to historical low. Major contributor to current possible misalignment in home prices appears to be significant supply constraint in Texas housing market. RECenter will continue to monitor and analyze.

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