Analysis by Jonathan Levin | Bloomberg
Mortgage rates have nearly tripled and housing affordability has plummeted, but US home prices aren’t really supposed to fall much — at least according to the prevailing narrative. As few buyers as there are, there are too few sellers to drag prices much lower, the optimists say. Austin, Texas, seems to disagree.
One of the hottest housing markets of the pandemic-era boom, the Texas capital has suddenly experienced a flood of existing-home inventory. The number of listings has jumped to the highest since 2011, and in a metropolitan area that has become accustomed to cycling through inventory in less than a month, it now takes more than three, according to data from Texas A&M University’s Texas Real Estate Research Center.
Austin is a unique case, of course, but it shows that the “lock-in effect” may not be the ironclad defense against home-price declines that some investors and homeowners think it is. As the thinking goes, homeowners aren’t supposed to willingly part with their below-3% 30-year mortgages when they would have to turn around and replace them with new home loans that carry interest rates above 7%. That’s true of the typical young family that may have been on the cusp of upsizing, but it’s not a hard-and-fast rule that applies to the entire country.
In Austin, what appears to be happening is an effort to time the top of the market. Like stock traders, Austin homeowners and investors who bought their properties before the boom appear to be rushing to cash in their chips. “I think people are nervous that home values are going to fall, so they’re trying to sell even if they have low interest rates,” says Jason Jarman. Some may have never lived in the homes; others may be taking the cash proceeds to smaller homes or cheaper suburbs; while others might just be moving into rentals while they wait out a market bottom to buy back in.
Although they’re still up on a year-over-year basis, Austin-Round Rock home prices are clearly rolling over, falling 6.9% on a sequential basis in the third quarter from the second, according to the Texas Real Estate Research Center’s home price index for single-family homes, which tracks repeat sales on the same homes. The declines are broad-based across price categories, although more expensive homes are holding up slightly better than mid-priced and lower-priced ones, the data show.
It’s possible that homeowners are also getting the itch to take profits in other recently hot markets such as Miami, Phoenix and Boise, Idaho. All of them were juggernauts that benefited from the combination of 2021’s low interest rates and pandemic-fueled migration. And now, many of their longtime residents are sitting on piles of untapped home equity, a tempting resource to tap as inflation eats away at purchasing power.
Granted, it’s not a given that this initial wave of listings will necessarily snowball in Austin or elsewhere. In fact, it’s conceivable that many of these sellers will start to pull their listings from the market once they see that they aren’t getting the offers they had hoped for, and the “lock-in effect” proponents could still be vindicated. Underwriting standards have tightened drastically since the financial crisis, and there are far fewer adjustable-rate loans, so it’s unlikely that the US will experience an imminent wave of forced selling. With few homeowners under water, the incentive is high to keep making mortgage payments rather than risk foreclosure.
So ultimately, the fate of home prices rests with the labor market. The median forecast in a Bloomberg survey of economists projects that unemployment will reach 4.5% next year. But with the Federal Reserve rapidly tightening financial conditions to tackle the worst inflation in 40 years, the range of estimates is wide — 3.3% to 6% — and the probability of a recession is rising. “If people start losing their jobs willy nilly, then yeah, these home prices will decline rapidly because there will be a surge in distressed sales,” Gaines told me. In other words, low inventories can probably buffer most housing markets for a while. But if the labor market starts to crumble, housing will probably crumble right along with it. In Austin, the low-inventory bulwark is already starting to fall apart.
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