How Rising Interest Rates Affects The Houston Real Estate Market
RISING INTEREST RATES:
Last week US Federal Reserve Chair Janet Yellen offered an encouraging assessment of the US economy, signaling that further rate hikes are in store for 2017.
Currently, the futures market is forecasting three interest rate increases this year.
Below, please find our analysis and forecast of the Houston real estate market based on three factors:
- Moderate increase in interest rates;
- Stated policies from the new administration;
- Current Houston economic data.
- Historical data shows that higher interest rates have not been bad for real estate returns.(1)
- In many cases, real estate has done well during periods of rising interest rates, as inflation has also increased in these period (benefiting hard assets like real estate).
- Rates are at historic lows, and many leading economist believe the 0.25% potential increases are “unable to be measured” (e.g. it would take 2-3% increases before it was seen in the economy).
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- However, any increase in interest rates would likely impact the total amount that most families can afford to spend (e.g. people who may have been looking at $725k homes may have to consider $700k homes instead).
- This may result in a surge of activity in early 2017 as people look to purchase homes and lock in rates before increases go into effect.(2)
- Houston job growth (positive, details below) is likely to overcome any dampening effect in interest rates.
- In addition, the re-emergence of buyers from the oil & gas sector (thanks to higher oil prices) will likely increase both the pace of activity and real estate prices.
- The administration’s proposed tax policies should benefit the luxury market (both directly and through a “wealth effect” from a higher stock market) and should also be a positive catalyst for prices and activity.
NOTE: We don’t have a crystal ball (disclaimers at the end of this article). This is our opinion. In addition, real estate is local. Neighborhoods will and do trend differently. See how your neighborhood is performing now or contact Paige Martin, one of the top ranked Realtors in the United States.
Summary Factors In Play
|Factor||Direction||Likely Impact On Houston Real Estate Prices|
|Interest Rates||Increasing||Negative (Rising rates could limit what people can afford to buy.)|
|Inflation / CPI||Increasing||Positive (Hard assets like real estate usually do well in periods of increasing inflation.)|
|Ability of Credit||Consistent||No impact (It’s critical buyers can get financing . . . and they can.)|
|Jobs||Increasing||Positive (This is the single most important factor. Houston added 15,700 net new jobs in the past 12 months.)|
|Energy prices||Increasing||Positive (⅓ of Houston’s employee base is tied to the success of the energy industry.)|
|Tax Policy||Decreasing||Positive for luxury segments (A reduction in personal income taxes would provide more funds to purchase assets.)|
|Stock Market||Increasing||Positive for luxury segments (The “invested class” benefits from the rising stock market wealth effect.)|
All in all, we are optimistic heading into 2017 both for increased activity and increased real estate prices and believe that Houston’s economic base is able to overcome any negative impacts from a moderate increase in interest rates.
HOUSTON ECONOMIC DATA
Job growth is the single most important metric when predicting real estate trends. To predict real estate growth, we want to see what employment rates look like.
The above graphic from economist Ted Jones from Stewart Title shows that jobs in the Houston MSA area have increased dramatically over the past decade.(3)
In addition, gains in healthcare, government and construction jobs overcame losses from the oil & gas sector.
The above graphic from HAR MLS shows that Houston’s median home prices continued its upward trajectory.
From looking at this breakdown (also from Ted Jones) it’s interesting to see how over the past year the sub $500k segment of the market (which is the primary number of homes that sold) did well enough to overcome softness in the luxury segments. (See Study Of Housto’s Best Performing House Segments.)
RISING OIL & GAS PRICES AND THEIR BENEFIT ON THE HOUSTON MARKET
Approximately 25-30% of Houston’s jobs are tied to the oil & gas sector.
Over the past few years, many of these professional “sat on the sidelines” and didn’t buy a new home. Many of these buyers were concerned about layoffs, further declines in oil prices and falling corporate stock prices. (See “Post Mortem” Study Of Oil Price Impact on Houston Real Estate.)
With oil & gas prices stabilized (for now), many producers are back increasing their rig count, making new hiring and growing their spending.
Oil & gas companies are expected to boost spending by over 7% in 2017. While this is a material dip from several years ago, the upward trajectory is bringing the employed professional from the energy sector, back into the Houston real estate market.
RISING INTEREST RATES
We are still in a period with some of the lowest interest rates in human history.(4)
Mortgage rates averaged 8.3% from the period 1976 – 2016.
Mortgage rates averaged 6.4% from the period 1990 – 2016.
Interest rates of 3.65% (average for 2016) or increases of 0.25% – .75% still are within the historic lows of any 10, 20, 30 or 100 year period in the United States.
As such, any moderate increase should not have a material impact on the real estate industry.
POTENTIAL NEW TAX & ECONOMIC POLICIES
It’s always difficult to look at potential policies of a new administration in insolation. We’ll start by taking a look at what’s been going on in the US economy.
US GDP growth has been positive for every quarter (except two) since Q4 2009.
Jobs have been growing and unemployment has continued to decline.
And income growth has continued to increase.
All of this sets the stage for a potential increase in inflation (compared to where it’s been over the past few years).
Historically, rising inflation has been good for real estate.
The potential “kicker” for the “Invested Class” (and a likely reason for the “Trump Bounce” in the stock market) is a reduction in tax rates.
As of the time of this writing, a specific tax policy has not been proposed. However, the various economic models proposed will likely all benefit the residents of Houston’s Core Inner Loop Neighborhoods (based upon our Salary Required To Live in Houston’s Hottest Neighborhoods).
All in all, in our opinion, the convergence of the following should continue to overcome any moderate increase in interest rates:
- Available credit
- Historically low interest rates
- Job growth
- Re-emergence of confidence from home buyers in the oil & gas space
- Increasing stock market
- Potential “extra cash available” from a new tax policy for Houston’s core inner loop buyers
Sources, Methodology & Disclosures