Homeowners in Texas have enjoyed exciting economic conditions over the past few years. People are flocking to the state in search of housing, and driving real estate prices higher than they’ve ever been – and far outpacing the growth of prior years prior.
It’s definitely a seller’s market, so if you decide to list your home, it will likely be sold in a matter of days – and you’ll reap an impressive price for the property as well. Of course, economic pessimists and real estate analysts predict these conditions may not last.
Some even suggest that these conditions are unnatural or irrational. If Texas real estate prices are the fruit of a bubble, or are overinflated, we might be in store for a crash.
But are current prices truly irrational? If they are, what would cause the Texas real estate market to crash?
Why Texas Real Estate Prices Are Up
First, it’s necessary to grasp why Texas real estate prices have been up. If these forces diminish, or some of them disappear altogether, that would cause a reversal of momentum, if not an utter crash.
It’s also helpful to analyze the origins of the growth in the local real estate market so we can evaluate whether current prices might be realistic.
- Low interest rates. Possibly the most important factor in rising real estate prices are the low Federal Reserve interest rates. During times of economic turmoil, as in the middle of a global pandemic, the United States Federal Reserve tends to slash interest rates. This in turn allows banks and major financial institutions to lend money cheaply to consumers and businesses. For consumers, this results in an increase in buying power; with a lower interest rate, you pay less over the life of the loan and incur lower monthly payments on a month-to-month basis. People are able to buy more expensive houses and bid more aggressively on the properties that interest them. This also heightens demand, because consumers who wouldn’t ordinarily seek to buy a home may try to take advantage of the friendly interest rates.
- Remote work and transitions. The COVID-19 pandemic has forced millions of Americans to work from home temporarily, and possibly on a permanent basis. People working from home have much greater flexibility about where they may reside. They also want to have a home environment they love, since they’re going to have to spend more time there. Accordingly, millions of Americans have expressed greater interest in relocating, which leads to higher demand and higher prices.
- Decreased inventory. Demand isn’t the only factor in the equation, of course. Supply has also had issues. In Texas, new home construction has been minimal, so not many new houses have entered the market. In addition, older residents are reluctant to move, which prevents their houses from reentering the market. The end result is a stifled supply, which adds to the high demand and pushes prices further upward.
- Increased interest in the state. Texas is also a great place to live, and more people are beginning to recognize that. Some people come for the state’s tendency to prioritize individual liberties. Others are drawn by the warm weather and open spaces. Still others come for the amazing culture in our biggest cities. Whatever their motivation, millions of Americans have chosen Texas for their new home over the past few years.
How Bubbles Form
Now we can talk about bubbles. Economic bubbles develop when prices rise to an irrational degree – at least, that’s the basic explanation. Typically, an asset begins to be overvalued due to some combination of hype, cheap conditions, and/or supply-and-demand problems. Then investors rush in to take advantage of what they regard as a rapidly growing asset. Soon, prices are pushed beyond their natural limit, and it’s only a matter of time before the bubble bursts. After the market reaches its peak, investors begin to bail out, and drive prices swiftly down.
How Realistic Are These Prices?
Economic bubbles are only a problem if prices have risen too high artificially. Is there a case to be made that Texas real estate prices are unrealistic or unnatural?
There’s plenty of room for debate on this issue, in part because bubbles are so complex and hard to characterize. You could argue that lower Federal Reserve interest rates are responsible for hyperinflating real estate prices.
You could also argue that higher real estate prices in Texas are purely the result of increased buyer demand. It’s much easier to analyze these matters in retrospect than in the moment.
What Could Cause a Crash?
What we do know is that the possibility of a crash is always real, whether a bubble actually exists or not. What could cause Texas real estate prices to crash? These are some of the possibilities:
- Higher interest rates. Low interest rates were a major factor in boosting real estate prices, so it stands to reason that rising interest rates would quickly result in a reversal of momentum. The Federal Reserve has announced plans to increase interest rates back to normal, but it will likely roll out the changes gradually and subtly enough that prices might not be significantly affected in the short term.
- Major economic issues. Any kind of major economic issue could have an adverse impact on the real estate market. If people lose jobs or see massive losses in their retirement portfolios, they’re going to be much less likely to invest in real estate. That will drive down demand, which in turn will depress prices.
- Significant political or cultural shifts. People have fallen in love with Texas, but they could just as easily fall out of love with the state. If Texas experiences large political or cultural shifts in the near future, that could weaken demand and cause the real estate market to plummet.
- A surge in inventory. A surge in real estate inventory could also push prices lower. Waves of new construction coupled with greater interest in selling Texas homes could accomplish this.
Are you a homeowner in Texas who’s looking to take advantage of rising real estate prices? Or are you nervous that a bursting bubble could hurt your real estate portfolio in the near future?
At Green Residential, we have the property managers and real estate experts who can answer all your questions. Contact us for more information today!