Cities With Volatile Housing Markets
The dictionary defines volatility as a “liability to change rapidly and unpredictably, especially for the worse.” The word is often used to describe the stock market, but in the current environment, it can also describe the housing market. Many cities in the United States have experienced a meteoric rise in housing prices over the last four or five years, and the market has shown signs of softening, which makes the market unpredictable and perhaps volatile. The Commerce Department reported a 6% decline in housing sales between March and June, and the National Association of Realtors reported soft housing numbers throughout the summer.
“It is clear that we are at a point where markets will begin to see downward pricing pressure,” said Ken Johnson, a real estate economist at Florida Atlantic University’s College of Business.
Johnson and several colleagues have developed the Beracha, Hardin & Johnson Buy vs. Rent Index. Based on a statistical model, the index determines whether it makes more economic sense for someone to rent versus purchase a home. The underlying idea is that it’s not a good investment to purchase a piece of property when prices are predicted to decline.
Johnson said 16 of the 23 cities in the index are currently in the rent category. These cities include Atlanta, Dallas, Denver, Honolulu, Houston, Kansas City, Los Angeles, Miami, Minneapolis, Philadelphia, Pittsburgh, Portland, San Diego, San Francisco, Seattle, and St. Louis. That means these communities are likely to experience some form of volatility.
“The scores for Dallas, Denver, and Houston have worried us for some time now,” the researchers said in a recent report. “The last time we saw scores of this magnitude, housing market crashes soon followed.”
Dallas has the potential to be a highly volatile real estate market in the coming months and years. Johnson said that every time a market has shown similar data, it has declined.
“All of these markets experienced significant price declines in their residential housing prices,” he said.
In March, Fitch rating service offered a report on the housing market in Dallas. It said the market was one of most overheated in the country and prices were nearly 20% too high. The market values have increased 40% over the last four years, and strong demand has fueled the market.
“Overvalued markets are more likely to experience a slowdown in price growth or a price correction,” the service said.
The market has already started to cool off. The housing market in Dallas saw 1.6% fewer sales in August, and the number of active listings increased 14%, according to the MetroTex Association of Realtors. The months worth of inventory increased to 2.8 year-over-year.
Denver was another market singled out in the Beracha, Hardin & Johnson Buy vs. Rent Index. The city was “worrisome in terms of local housing market conditions.”
In August, single-family home sales in dropped 7.46% from July and are down 9.75% year-over-year. Condos saw a similar drop as well. They were down 5%. To deal with the softening market, 30% of sellers dropped the listing price in August. The median price of a single-family home sold in August was $445,000, down 1.1% from July but up 8.54% from a year ago.
The head of the Denver-Metro Association of Realtors was not concerned about the slight decline in the market. He said the market continues to be strong, and the larger number of homes on the market gives buyers more choices.
“Over the past four years, we’ve experienced the strongest sellers’ market in recorded history,” said Steve Danyliw, chairman of the Denver-Metro Association of Realtors. “This past month, we saw available homes for sale increase to the highest level in four years, giving buyers more homes to choose from.”
Some real estate professionals, however, have particular concerned about the luxury condominium market in Denver. The city has seen a large number of tower projects built in recent years. The influx in the number of condos on the market is putting downward pressure on the market.
“I personally believe that Denver is overbuilt,” said Kelley Klobetanz, chief underwriter at Greystone & Co. in Denver.
Despite being subjected to Hurricane Harvey last year, the Houston real estate market is still red hot and has not started to cool down. In June the region saw 8,518 single-family homes sales, an all-time record, according to the Houston Association of Realtors. The previous record was 8,367. The average price was $316,463, an increase of 4.3% and also a record for the city. The trend continued in July and August.
“If there were concerns about rising home prices in the Houston market, you wouldn’t know it from all the home buying that took place in June,” said Houston Association of Realtors chair Kenya Burrell-VanWormer. “We continue to outperform last year’s record pace of home sales, but we’ll keep a close eye on inventory levels in the weeks ahead to ensure they are meeting demand.”
Strong job growth and a healthy energy sector are seen as the main drivers of the real estate market in the city, but affordability is becoming an issue. CoreLogic and the Beracha, Hardin & Johnson Buy vs. Rent Index have both identified it as an over-valued market with the potential for decline.
Las Vegas was ground zero of the housing crisis. After the crash, the city was filled with blocks and blocks of abandoned houses. Construction stopped on some housing developments midway through construction of a house. It’s taken a while but Las Vegas has come back with a vengeance.
Housing prices have grown steadily since 2014, and many are approaching all-time highs. Early this summer, Fitch rating service listed the city as the most overvalued real estate market in the country. Fitch looked at unemployment, household incomes, rent levels, and mortgage rates, and it argued that the housing market was 20 to 24% overvalued.
It appears the market has started to respond. Sales were flat over the summer in the Las Vegas region. The median price of a single-family home was $295,000 in August, the same as in May. The housing inventory also increased in August, and single-family home sales were down 6.4% year-over-year.
“Our housing market has been cooling off a bit this summer,” said Chris Bishop, with the Greater Las Vegas Association of Realtors. “I wouldn’t say we’ve shifted from a seller’s market to one favoring buyers, but we’re starting to see the scales tilt more in that direction.”