Houston Real Estate Market: 2018 Forecast | 7 Things to Look Forward To (or Fear) in 2018

Houston Real Estate Market: 2018 Forecast7 Things To Look Forward To (Or Fear) In 2018

We took a deep dive into the home sales trends of the past two decades to come up with 7 predictions that should shape (for better or worse) the 2018 Houston real estate market.

“Paige Martin is the best Realtor. She is highly experienced and very knowledgeable. She made our buying experience an enjoyable one, not only for us, but for our daughter, son-in-law and several of our friends. We have bought and sold many houses, and Paige has been the best realtor we have ever worked with. We highly recommend her.”

Jeremy & Lynn Greene

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1. In 2018, Houston’s real estate market eclipses the 2015 peak.

Even including Hurricane Harvey, incredible political uncertainty, and a week off to celebrate the Astros’ winthe Houston real estate market had its second best year ever in 2017.

In addition, the market came within 3% of the 2015 peak (based on both median sales price & sale price per square foot).

Why is the Houston real estate market growing so much? Job growth!

Source: Greater Houston Partnership, Employment Forecast 2018

The forecast for 2018 includes even stronger job growth thanks to the large pricing gains in the oil & gas sector over the past 6 months.

Source: Greater Houston Partnership, Talking Points Q4 2017

We believe oil & gas prices will remain positive, job growth remains strong and brings with it a record real estate year for Houston, Texas.

2. Tax reform benefits all segments of Houston’s real estate market.

This is one of our more controversial predictions as it relates to the luxury market. The National Association of Realtors (NAR) lobbied quite strongly against the $10,000 property tax cap.

For details, here is one of the best, unbiased summaries of the tax reform bill we’ve seen.

As it relates to the general Houston real estate market, we believe there are three major factors at play—all of which benefit homeowners.

  • More Money (Good). According to the Congressional Budget Office (CBO), approximately 80% of Americans will see a tax cut. More people with more money will stimulate the economy. A percentage of the beneficiaries will likely put more of this money into the housing market (rentals or purchases). This increases demand.
  • Wealth Effect (Good). The major beneficiaries of the new tax reform were tax paying corporations as their tax rate dropped from 35% to 21%. The Dow raced 25% higher in 2017. For the 54% of Americans who have money in the market, that’s a material increase. In addition, the Dow is up over 300% since the Great Recession. The same thing happened in late 1990’s, 2004–2007 credit growth cycle, or 2010–2014 oil boom: When Houstonians have more money, house (and land) prices increase at rates above our long-term averages.
  • Repatriation (Good). US companies are currently parking around $2–3 trillion in cash overseas. Over $475 billion is held by companies who have a major presence in the greater Houston area. If these firms bring this money back to the US (which they now have an incentive to do) and invest in growth in the region, it could bring a boom that could rival or exceed 2013.

As it relates to the luxury market (over $500,000) there is another factor at play:

  • Deduction Cap (Bad). The deduction for property income taxes is now capped at $10,000 per year. NAR fought against this hard (and lost). It’s bad for luxury properties because if you’re paying $30,000 in property taxes, you don’t get to deduct the extra $20,000. The “tradeoffs” from the bill’s planners are that overall tax rates go down, and the standard deduction doubles. It’s unknown how or if this will impact the luxury market.

However, we believe this will be offset by two main factors:

  • Taxes are complicated, and they’re not a primary buying decision. In my 15 years of real estate sales (selling over $350M of Houston residential real estate), never have I had a client who has shown me a calculation (or asked for one) about their estimated tax deduction based on estimated property taxes. While people look at their overall property taxes closely, the ability to translate this amount to a “net, end of year difference” when comparing two homes is not something I’ve ever seen.
  • There’s a massive economic incentive for the highest earners in high tax states to buy homes in low tax locations like Houston, Texas. We’re seeing a major uptick in interest from residents from CA, NY, IL and CT in relocating to Houston (or buying a second home here that they claim they live in for 183 days). The math works out (for many people in the top-tier tax bracket) where they could buy a “free home in Houston” solely based on changing their tax base.

3. In 2018, at least 5 close-in Houston neighborhoods increase average prices by 10%+

Houston’s long term property appreciation rates have averaged about 2-3%.

Over the last year, five close-in Houston neighborhoods increased in value by more than 10%. We believe at least five neighborhoods will also increase in value by double digit percentages in 2018.

View Houston’s 52 Top Neighborhoods and the 8 with the largest appreciation rates

View the Inner Loop’s Top 14 Neighborhoods in real estate appreciation

4. Land values in prime neighborhoods continue to set pricing records.

We have completed a study of 400,000+ Houston home sales since 2000. The best investments tend to be single-family homes with the following characteristics:

  • Located in quality neighborhoods that have good proximity to major job centers;
  • Large lots (the primary value is the land value);
  • Not located on a busy thoroughfare, near a highway or near a railroad;
  • A street location with some kind of premier feature (by a cul-de-sac, on a street with a tree-filled median, etc.);
  • With a home that is livable and can be rented. Typically, new construction homes come with a higher purchase premium and “true fixer uppers” require too much investment.

Over the past 5 years, land values in 15 close in Houston neighborhoods have appreciated by more than 50%. We believe that these trends will continue in 2018. (Contact Paige Martin for our top recommended areas.)

5. Average prices on at least 3 new construction buildings fall below the “original developer price.”

Since the end of 2016, 15 new residential high-rises have launched (or are in the process of launching). Notable buildings include:

The supply of luxury Houston condos has increased by more than 400%.

In nearly all cases, the developer sold on spec (where the client didn’t have the ability to evaluate their views, quality of build out, finishes, where they park, where their guests park, etc.)

As you can imagine, not all developers, views, HOA governance, guest parking, etc. are living up to expectations. (As a note – we really like 3 of the new construction buildings – contact us for details).

In one building’s case, the developer offered US Visas as part of the package. Quite a few buyers cared more about qualifying for the visa than they did about resale trends.

In 5 different cases so far, units have sold under “the developer’s price” – in one case the total sale price was over $650,000 under the original price.

Some of the buildings are wonderful, but several of them have material risk of view loss and other opportunity gaps.

In 2018, as more inventory comes online, we think the winners will separate from the losers. We believe quality buildings with quality staff in quality locations with quality views will do well.

However, we believe that disadvantaged buildings (and disadvantaged units) will take a material haircut. We believe many individuals who bought directly from the developer sales staff with no representation, comparable pricing analysis and/or thorough inspection will take a substantial loss upon selling.

If you’re looking at new construction, luxury condos – contact Paige Martin for a candid conversation about New Construction Luxury Condos In Houston.

6. At least 5 new construction condos projects fail.

As an extension of the risk above, in the last few years 37 different residential high price projects were launched.

We don’t believe all of them (or many of them) are quality purchases, if the owner cares about resale within 3-7 years.

At least 11 of them have been cancelled so far. Examples include: 1400 California, 3615 Montrose, Aurora, Chateau Ten West U, Flats on Fairview, Monroe at Bayou Park, and Museum Flats.

Some of the new projects are located on the same land as these cancelled projects (and they have the same fundamental problems related to pricing, location, value being offered, HOA fees, construction costs, or guest parking).

In 2018, we believe at least 5 of the new construction projects which currently have deposits will fall apart.

If you’re looking at new construction, luxury condos – contact Paige Martin for a candid conversation about New Construction Luxury Condos In Houston.

7. Rental rates fall in most Inner Loop neighborhoods.

During the oil boom, projects adding about 90,000 new, residential apartment units were announced in Houston. They have been coming online over the last several years.

As of mid-2017, Houston had about 662,400 units, with approximately 47,000 of them vacant. Hurricane Harvey filled many of them and boosted rentals in the latter part of 2017.

However, we believe 2018 will bring a decline in rental rates.

Downtown Houston is a great microcosm of the challenge:

  • About 5 years ago, there were approximately 3,000 downtown residential units (mostly in Houston Lofts for Sale)
  • Over the last 3 years, approximately 6,000 new residential lease units have come online.
  • In addition, over the next 18-24 months, an additional 3,000 new residential lease units are planned.

When you more than triple the supply, prices (at least in the near term) typically suffer.

As you see in the following graph – median lease price has been declining consistently. Prices had an uptick in 2017 (over 2016) thanks to Harvey.

In addition, the average Median Lease Price/Sq Ft is misleading because the new construction buildings (since 2015) have been renting at much higher rates. “Existing inventory” has been in a pattern of consistent decline.

We suggest being cautious on purchasing Homes for Rent or Multi Family Homes for sale in Houston and specifically focusing on owning quality land and properties for the long term, while the overbuilding of rental units gets fleshed out of the market over the next few years.

As always, real estate is hyper local, see how your neighborhood is trending now or email us:
We can give you a custom report of how your area and/or property is doing.
Disclosures
  • We don’t have a crystal ball. All predictions are our educated guesses. Caveat emptor.
  • #1: Data covers single family, townhome & condo sales in areas 4,9,16,17,22,23,24 (“Close in Houston”)

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