The select few who bought their homes in early 2022 may find they’re unfortunately, upside down on their home’s value right now. Home values dropped 13% between June and December leaving many buyers waiting on the sidelines even today, wanting to buy but worried - or maybe hoping - values will keep dropping. That begs the question, how can you know when it’s the right time to buy? Have you missed your chance at rock bottom prices or is the carnage still to come? Well that’s what we’re going to talk about today. We’re going to talk about exactly which metrics you need to be watching to predict where interest rates are headed. Next we’re going to check in with the experts to see if we’re actually seeing those things happen right now and of course we’re going to take it local. With inflation reports and bank failures, how is this affecting the Dallas Housing Market? Should you be getting out your checkbook right now, or is the worst still to come?
If you’re anything like me you’ve probably laid in bed at night wondering when prices will bottom out in Dallas.
What you want to look at in the market are actions that will drive interest rates. The one thing that has been effective at slowing buyer demand and driving prices down in Dallas has been those higher interest rates shutting down affordability.
So what affects interest rates in the housing market?
If you just answered ‘the Fed raising interest rates’ you’re wrong, okay, wrong. It’s much more complex than that. The Fed’s actions play a key role in affecting interest rates but rates are driven by inflation, they’re driven by the bond market, they’re driven by market sentiment and yes they’re driven by the Fed’s actions. All of these factors are interwoven and they play off each other. It’s quite possible for the Fed to raise their benchmark rate and have interest rates go down again because the Fed is not the only influencer here.
In fact, it could very easily be argued that inflation is what drives interest rates. Everybody’s watching inflation and you should be too. If you want to get a fantastic deal in a house you need to watch inflation. Now these are the metrics you need to have your eye on. You want to look at the Personal Consumption Expenditures Index, the Consumer Price Index and you want to be looking at employment, new jobs.
If your goal is rock bottom prices, no matter what your interest rate and monthly payment are, it’s just about the prices, then you want to see these metrics going up. If they go up, it shows inflation is still high. High inflation is going to trigger the events that cause interest rates to rise. So if you are in the ‘I want rock bottom prices’ camp you’ll want to be seeing these metrics go up. You want to see higher PCE, higher CPI and more new jobs. As long as those things are happening you can be reasonably assured that rates are still going to rise.
Now you may have a completely different goal. Your goal may be affordability. I can tell you right now when prices hit rock bottom that is not going to be when homes are most affordable. I realize that may seem counterintuitive but interest rates are what make the difference in affordability, far more so than lowering home prices. Zillow points this out as well. They say “Falling rates are far more helpful for affordability than falling home prices.” Rock bottom prices are going to come when interest rates are at their highest. But even though the prices may be low, you’re still going to be paying a higher payment because of the interest rates.
If affordability is your goal, you want to see interest rates come down, so you want to be watching for these metrics going down. You want to see PCE and CPI dropping and you want to see no new jobs. Believe it or not when you’re falling asleep at night you find yourself sort of hoping for a recession. Gosh that really sounds bad. But basically when inflation comes down, interest rates come down with it. And I can tell you right now, this is what Realtors want because we know affordability will help the market.
Now that you know what metrics to watch for, what is going on with the market right now? What are the inflation measurements telling us and where are interest rates headed?
Well, thus far we’ve seen a lot of turbulence and a lot of surprises. When January numbers were released in mid February it was bad news across the board. -Or good news, depending on your goal! PCE, CPI and employment all went up.
Andrew Kelly explained that, “The personal consumption expenditures…tracked by the Fed for monetary policy, shot up 0.6% last month after gaining 0.2% in December.”
Not only that, but Alicia Wallace observed that consumer spending did too, “showing the continued strength of the US economy — and that rising prices won’t be so easily defeated.”
In terms of CPI, Jeff Cox reported that “Inflation rose 0.5% in January, more than expected and up 6.4% from a year ago” He continued saying, “January’s data shows inflation is still a force in a U.S. economy in danger of slipping into recession this year...despite Federal Reserve efforts to quell the problem.”
To look at job increases, we have to look at unemployment and it’s measured in two ways, the business survey and the household survey. The business survey revealed 517k new jobs and the household side came in at a whopping 894k jobs. This caused the unemployment rate to drop from 3.5 to 3.4%, the lowest number since 1969.
As of mid-February we had strong jobs reports and higher than projected CPI and PCE. The experts weren’t terribly optimistic.
Oscar Munoz reports "We currently expect two more hikes...But the risk is towards higher rates. The labor market remains strong and it's going to take a bit more time for it to start showing signs of deterioration,"
Jeffrey Roach, chief economist at LPL Financial said. “Clearly the risks are rising that inflation will not cool fast enough for the Fed’s liking.”
Peter Cardillo, Chief Market Economist with Spartan Capital Securities reports, “The Fed is probably going to be more hawkish. Whether that translates to a 50 basis-point rate hike in March remains to be seen. But we are likely to see three more rate hikes.”
As you can see, the general consensus was that January’s numbers would result in the Fed raising rates higher than expected for longer than expected. Before January’s numbers it was expected the Fed would raise by 25 basis points but after receiving those January numbers many began predicting it would be a 50 basis point increase.
Keep in mind as long as inflation numbers are high chances are mortgage rates are going to go higher and that’s exactly what happened. And remember, if rates go up the general result is that people can’t afford houses so prices are going to go down.
{But then…Bank failure}
Just a few weeks later while everyone was still focusing on inflation indicators, we began to see this unexpected crisis of bank failures. One after the other we began to see several banks taken over by the FDIC with the first being Silicon Valley Bank. Well, that sort of changed everyone’s perspective.
Michael Gapen, BofA’s chief U.S. economist commented that “Our outlook for monetary policy is always data dependent; at present it is also dependent on stresses in financial markets.”
Yeah that’s putting it mildly.
Elisabeth Buchwald chimed in that, “It's been a tumultuous few days for banks”
First, “Silicon Valley Bank announced… it had suffered a $1.8 billion… loss and urgently needed to raise more capital.”
Well, it wasn’t successful. SVB failed to raise the capital it needed and the Federal Deposit Insurance Corporation (took) over the bank.
This was an alarming development because “The bank's failure marks the second largest in U.S. history after the 2008 demise of Washington Mutual.”
And honestly this bank failure had the potential to be catastrophic to the economy. The FDIC insures up to $250,000 per account holder in the event of bank failure. Many businesses had millions of dollars in Silicon Valley. If they lost those funds they wouldn’t be able to pay their employees. We would have seen massive unemployment. This would have shuttered the whole inflation problem in a very ugly way. Not to mention the general fear it spreads throughout the public. Many citizens would feel their banks cannot be trusted. I don’t think I need to tell you what would happen if everyone suddenly decided they needed to withdraw all of their money from the bank.
However the Fed realized this. Elisabeth Buchwald says “The Federal Reserve, Treasury Department and FDIC announced that SVB and Signature Bank's failures posed a big enough risk to the entire banking system that it merited allowing regulators to take the unusual step of guaranteeing the larger deposits.”
They continue that in addition, “The Fed…will provide financing by offering loans of up to a year to eligible banks... The move is intended to prevent a wave of bank runs that would threaten the stability of the banking system and the economy as a whole.”
Now it’s important to point out, had the Fed not intervened with insuring all depositors, this would almost certainly have triggered a turning point for the housing market and interest rate hikes would have come to a halt. But that’s not what happened, the Fed did insure the depositors so let’s see how the experts responded.
Goldman Sachs’ response was that “In light of the stress in the banking system, we no longer expect the FOMC to deliver a rate hike at its next meeting.”
On the other hand, Citigroup economist Andrew Hollenhorst said “Fed officials are unlikely to pivot at next week’s meeting by pausing rate hikes, in our view”
Michael Gapen, BofA’s chief…economist says “If the Fed is successful at corralling the recent market volatility and ringfencing the traditional banking sector, then it should be able to continue its gradual pace of rate hikes.”
Allianz SE had some excellent insight. They said “Elevated price pressures and a resilient economy prompted Fed officials to strengthen their hawkish rhetoric in the past few weeks.” However, they continued, “The SVB failure suggests a turning point in the monetary cycle: interest rates have reached a level sufficiently high to trigger a recession.” He continues, this “should alleviate inflationary pressures markedly by the end of the year.”
Regarding the Fed’s next meeting they said, “We expect the Fed to hike by 25 basis points in (the) next meeting…We think the Fed will deal with the banking crisis through its new lending facility.”
Overall, combining January’s strong numbers and the bank failures, the general consensus is that the Fed will raise rates again at its next meeting but not as much as they were going to. There was concern it would be 50 basis points but now, with this bank crisis, it will probably be 25 basis points
How is Dallas responding to the economic roller coaster?
Well, we saw a volatile year in 2022. Home prices shot up between January-May and dropped just as quickly the second half of the year. Year over year most areas in the metroplex showed zero or very nominal gains.
Dallas Morning News reports that “The median price of a single-family home in Dallas-Fort Worth was $380,000 in January, up only 4% from a year before.” And their point really was that this is “a noticeable departure from the double-digit percent increases seen through most of last year.”
They also share how “Sale prices have declined 13% from last year’s peak of $435,000, according to the latest housing market report.”
Despite all of this, the Dallas market is still trucking along! Let’s compare median sales prices in the six main counties.
In Denton County, in January of 2022 we saw a median sales price of $420,000. In February of 2023 we saw a median sales price of $425,000.
In Collin County in January of 2022 we saw a median sales price of $465,000. In February of 2023 we saw a median sales price of $485,000.
In Dallas County in January of 2022 we saw a median sales price of $315,000. In February of 2023 we saw that median sales price become $345,000.
In Tarrant County in January of 2022 we saw a median sales price of $327,000. By February of 2023 we're seeing a median sales price of $339,945.
In Rockwall County in January of 2022 we saw a median sales price of $390,000. By February of 2023 we saw a median sales price of $415,000.
And finally in Ellis County we saw a median sales price in January of 2022 of $377,923. In February of 2023 we see a median sales price of $374,900
So of the six counties, five saw an increase in median sales price year over year. That may not have been what you were expecting. Interest rates are at 6-½%. Why are we seeing increases? Well, seasonality and demand are in a tug of war with interest rates and affordability. From a purely seasonal standpoint, Dallas is very predictable. January is always the lowest month of the year, February is typically slow, then the spring and the summer tend to be very strong. In the fall things generally slow down which turned last fall into a slaughter since the Fed decided to mega raise rates at the same time. Typically we would see strong price movement in the spring, so you can see interest rates are definitely putting a damper on things. Still, prices are not going down, they’re holding their own.
So that gives you an idea of the here and now.
But what can we expect moving forward?
Are prices at rock bottom? Should you be buying right now if you want to catch the best prices? Or are they about to drop some more?
Well, if we continue to see the same pattern we’re seeing now, seasonality and demand will duke it out with interest rates and affordability. We’ll probably see nominal appreciation over the next few months, if any at all. But let’s check in with the experts and see what they have to say.
In addition to the projected rate hike in March, Allianz calls “for another 25 basis point hike in the May meeting, which will cement the Fed’s anti-inflation credibility credentials.” Isn’t that nice, that this is about their credibility?
They say, “The Silicon Valley Bank failure reinforces our view that the US economy is headed for a sizeable recession during the second half of this year.”
They continue that “The recession-induced fall in core inflation in the second half of 2023 will allow the Fed to pivot in November-December.”
Finally, they conclude with the news we all want to hear, “We expect a 25 basis point cut in November followed by a 50 basis point cut in December.”
If Allianz is correct, that we begin to see rate cuts by November, I believe it’s possible we may be at rock bottom prices right now.
We’re seeing this duel between seasonal demand and affordability play out in the Dallas housing market right now, right, we’re seeing these nominal price increases.
Then what we would expect to see as Fall rolls around is for the market to slow down and for us to begin to see those prices going down again. However, according to Allianz that’s exactly when the Fed is going to begin dropping interest rates.
If that’s the case we might expect to see Dallas home values held up by seasonal demand over the spring and summer, and then reinforced with rate cuts in the fall.
The big question is, is Allianz alone in their prediction?
With today’s rates at around 6-½%, Greg McBride, chief financial analyst at Bankrate says we should "expect mortgage rates to yo-yo up and down in the first half of the year”. Then he goes on to predict "Thirty-year fixed mortgage rates will end the year near 5.25%.”
Zillow Research also checks in. They say “Home prices nationally should bottom out in 2023 then return to a more normal growth rate.” They say “Affordability challenges are still dragging down demand for homes” - that would be the tug of war effect right, of seasonal buyer demand vs affordability.
However, they continue that “Starting next year… the panel foresees price growth picking back up, at an average clip of 3.5% per year through 2027.”
In Zillow’s mind, home prices are going to be sluggish throughout 2023 and then pick up in 2024. That would tend to coincide with what Allianz is predicting. If rates begin dropping at the end of 2023 we would anticipate price growth to pick up in 2024.
In regard to the interest rate question, you know, when interest rates are going to come down, economists and housing experts polled by Zillow responded that “The panel expects mortgage rates to trend downward after the first quarter.”
Zillow reports that when “Asked when rates for 30-year fixed loans will be highest between now and 2025, nearly two thirds of those surveyed, (63%) pointed to Q1 of 2023. A distant second was the second quarter of 2023 at 22%, and subsequent quarters earned 6% or less.”
So overall when we check with these experts, they’re projecting interest rates are the highest they’re going to be right now, that as we work our way towards the end of 2023, we’ll begin seeing rates drop. This isn’t the story we were hearing in February but these bank collapses have really brought a paradigm shift.
So back to answering our original question, “Have prices hit rock bottom, or is more carnage still to come?”
Well the experts are saying two more rate hikes, then predicting lower rates by the end of the year. That is not the song they were singing in February. At that point they were saying to plan on more rate hikes for longer. But we’re seeing cracks in the dam now and I think that’s really changed the rhetoric.
We also know that from a seasonal standpoint, this is typically a time of high demand in Dallas. But how will that demand stand up to two more rate hikes? I think that’s going to answer our question of what prices will do. It’s very much a tug of war between these two forces.
If rock bottom prices are your goal, if the experts are right it’s possible we’re already there or that we may be there within the next few months because once rates begin to go down, prices will begin to go back up in Dallas.
Now I hear the affordability camp screaming loud and clear, ‘Wendy we have an affordability crisis and prices are not going to go up.’ I agree. We have a big affordability problem. But what you have to realize is what I said in the beginning, interest rates are what will effectively improve affordability. It takes very little movement, just a point to bring the same affordability that it would take a massive price drop to bring. You want to see your monthly payment improve through prices dropping $100,000. And doggonit you’re willing to wait until that happens.
What you need to realize is before that ever has the chance to happen, either Dallas buyer demand will drive prices back up again or interest rates will go down and you’ll have the same effect. If affordability is your goal, watch for those stressors in the market and watch for those rates to go down. Only you can decide how low rates need to be. In January many buyers re-entered the market when they could get a 5% interest rate. Something for you to be watching is the larger the economic calamity, the deeper the recession, the lower you could anticipate rates dropping. Just remember you are very much NOT alone in your wait and low interest rates in Dallas will bring back bidding wars, the whole no inspection period and the having to offer over bid price situations.
If affordability isn’t the issue necessarily, that it’s more about equity and not wanting to see values drop further, you know, just wanting to make sure you get the best possible price, you will want to enter the market while rates are still high. At this point that road already seems to be laid out, the experts are saying we’ll see lower rates by the end of the year. The funny thing is that just a month ago they were saying higher rates for longer. But it’s those bank failures that have brought such a change in predictions. So, are prices bottomed out in Dallas? The experts do all seem to think that’s going to happen in 2023 but whether that’s right now when demand is fighting with affordability or in the fall when demand drops off and maybe rates haven’t gone down yet, it’s hard to tell. I can tell you this much, we at Home in Dallas will constantly keep you updated - which sounds like a good reason to subscribe. Now, as you’re monitoring the market, keep in mind the power of the motivated seller. Think outside the box. You may not need the market to take you to rock bottom prices. You may be able to get there just by finding a desperate seller. In fact I made an entire video about the most motivated builders in Dallas that you can watch right here.