As I travel across the state, I am often struck by the sheer volume of homebuilding going on in cities large and small. Former pastures have grown into neighborhoods at amazing rates. While the population of Texas is rising (both due to natural growth and through in-migration), that is only one trend among several driving the expansion in our demand for (and supply of) housing.
Demand for housing boils down to affordability. Texas’ affordability (a measure of the ratio of an area’s median household income to the median price of a home) varies across the state; however, in most areas, households with average incomes can afford average-priced homes. Other states face far less favorable ratios, with land constraints, regulatory patterns, and other issues contributing to pricey housing.
There are two essential factors that determine whether a household can afford a house: income and cost. For a home (a first home, a newer home, a larger home, or a more expensive home) to become a reality, available income must exceed the cost. Let’s first look at incomes.
The lion’s share of most households’ incomes arrives in the form of payments from an employer (or draws if self employed). The ongoing recovery has encouraged stability in wages and has helped alleviate fears of further job cuts. In fact, many companies are beginning to add positions and pay out better bonuses and wages than in the recent past. Given these factors, many families are more willing to start the home-buying process.
As part of the purchase process, families must typically locate mortgage financing. In this regard, there are provisions of the Fair Credit Reporting Act and other trends in the sharing of consumer information that are beneficial. Essentially, the availability of more and better credit-related information enhances the probability that a loan officer will approve a mortgage loan application.
On the other side—the cost side—the price of the house is, of course, the primary determinant of the total mortgage payment. However, the historic lows we’re seeing in interest rates reduce the monthly outlay; they also encourage some people to move ahead with a purchase in order to take advantage of these savings. In addition, we’re working through insurance-related issues (such as problems dealing with black mold claims) and rates are stabilizing as insurers re-enter the market.
Another trend helping homebuyers is the advent of creative financing methods. These have been around for some time, but are now more favorable and available than ever. You can find mortgages where all you pay is interest for some period of time, for example. There are also ways to avoid double closings when you build a new home. Interest-only mortgages greatly reduce monthly payments, and can work very well for homebuyers with the discipline to put away money for future principle reductions.
I was a rather young economist during the real estate boom and bust of the 1970s and 1980s. (Certainly, I had more hair.) I saw first hand the excessive overbuilding and the later debacle in the housing market. This time, there’s no resemblance. The other was a tax-policy, oil-boom driven anomaly. By contrast, the current situation is characterized by sustainable growth, favorable financing, natural population expansion, and an economic recovery. There will, of course, be real estate cycles, but there is no reason to expect a crash.
While there is still a need for improvement in the area of ensuring that all families desirous of a house can afford one, things are going in the right direction. In Texas, the combination of good things on both the income and cost sides will keep the conversion of fields to neighborhoods going for years to come.