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Experts’ Insights: Texas Real Estate Outlook 2020

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Experts’ Insights: Texas Real Estate Outlook 2020
10 min. read

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Boasting one of the strongest job markets in the nation and sustained population growth, Texas puts its best foot forward at the beginning of 2020, and is expected to outperform the national average, as well as many other markets across the nation this year.

According to the Bureau of Labor Statistics’ most recent data, Texas’ monthly unemployment rate reached a historical low, 3.4%. The job market’s strong momentum coupled with low mortgage rates and the state’s potential to grow and add housing will be the main forces behind what experts call a robust real estate market in Texas in the coming year.

To access more in-depth insights on the evolution of Texas’ biggest real estate markets, find out about housing development forecasts for the coming year, and advice on the future of renting and owning, we’ve talked to experts from the most prestigious universities across the state. Read their answers below to see where the Texas housing market is headed in 2020.

Experts’ Insights

Shannon Cornelison-Brown
Assistant Professor of Accounting
Austin College

In your opinion, what does the real estate market have in store for Texas in 2020?

The strong job market fueled with low mortgage interest rates will sustain a robust real estate market in Texas for the 2020 year.
According to the U.S Bureau of Labor Statistics, the most recent monthly unemployment rate published is 3.4 percent, which is the lowest unemployment rate for Texas in approximately half a century. The historically low unemployment rate is supported by the pro-business incentives offered by the state. Texas has no state income tax, minimal unions, and can negotiate certain tax abatements. The operating costs for business are favorable in Texas, and geographically, Texas is a central location between the east and west coast. These advantages have enticed many large companies to transition their headquarters to Texas, such as Toyota, Boeing, Charles Schwab, Merck, Kubota, Pizza Hut, Keurig Dr. Pepper, JCPenney, PGA of America, McKesson, and more.

While mortgage interest rates are not dictated by the Federal Reserve, the federal funds rate indirectly influences the mortgage rates through the price of credit. The federal funds rate hit 62-year lows in late 2008 through early 2017. After early 2017, the federal funds rate began a slow incline until mid-2019, in which the federal funds rate trickled off. The federal funds rate should remain sluggish for 2020, providing flat interest rates for the year. These investor-friendly mortgage interest rates will assist the strong market in providing a strong real estate market.

Naturally, variables exist that can alter this short-term projection in the real estate market. The political climate as the nation enters a presidential election can have profound effects on the housing market. With the turbulent trade war with China, a first-stage trade deal is anticipated to be executed this week. If the proposed trade deal is signed, China is promising to purchase approximately $40 billion in agricultural products. If this deal remains unsigned, farmers may continue to suffer revenue declines. Farmers exiting the agricultural business could lead to real estate decline in rural areas of Texas. With the unsettled military rumblings in the Middle East, the oil and gas industry, the state’s largest export, could see quite a change in 2020.

Would you recommend buying or renting in the largest cities in Texas this year?

My recommendation on purchasing or renting real estate is purely dependent upon the intention and lifestyle of the individual.

If the individual plans on transitioning jobs or markets in the short-term, my recommendation is renting. Renting enables individuals to transition fluidly without finding the next tenant or owner. In the largest cities in Texas, investor funds have caused a large supply of apartment options. An individual has a high likelihood to obtain rental concessions due to this oversupply of apartments. Additionally, there are costs, some unforeseen, that come with homeownership. Typically, homebuyers pay between 2 to 5 percent of the purchase price in closing costs. The purchaser incurs the opportunity cost of the down payment, potential home maintenance, insurance, and, in the first few years, the majority of the mortgage is allocated to interest expense. According to the State Comptroller, Texas is the nation’s sixth-highest “effective” property tax at 1.67 percent annually. With an annual real estate appreciation rate for Texas around 5 percent, a short-term homebuyer will likely be able to cover these costs.

For individuals looking for a long-term residence, my recommendation is to purchase. The continued appreciation over multiple years will break-even for the long-term buyer. However, the purchaser should be aware that due to low interest rates and low unemployment rates, property is moving fast and often with a premium on the purchase price.

Randall Guttery
Clinical Professor of Finance and Managerial Economics
Director of the Weitzman Institute for Real Estate
Naveen Jindal School of Management
The University of Texas at Dallas

In your opinion, what does the real estate market have in store for Texas in 2020?

The Texas residential real estate markets continue to perform well, both for owner-occupants and for investors. In 2020, we likely will experience more of the same, as Texas and nationwide home values should rise about five percent. While sale prices, rental rates and the number of listings will increase at a decreasing rate, relative to the past few years, demand continues to outpace supply. In fact, one concern is that the Texas supply of housing is still less than half of a normal market. Specifically, there is about a three-month supply of housing in Texas, while the norm is about six months nationwide.

Home price gains in 2019, according to CoreLogic, were led by Austin (4.8%) and followed by Fort Worth (4.5%), San Antonio (3.6%), Houston (3.1%) and Dallas (2.8%). For Texas, it was 3.3% and for the nation, 3.7%. The slowdown in housing values in early 2019 was more than offset during the last half of the year. Historically low interest rates continue to aid homeowners, as rates were more than one percent lower in November 2019 than November 2018.

Would you recommend buying or renting in the largest cities in Texas this year?

I recommend that each real estate participant choose what is best for him or her. For some, buying makes sense if they have a more permanent need, would qualify for tax-deductible mortgage interest and property tax payments reported on Form 1040, Schedule A, would like to own an asset that should be a hedge against inflation and would enjoy “pride of ownership.” For others, renting makes more sense if they have a temporary need, want to commit less money up front (down payment and closing costs vs. a couple of months’ rent to cover the security deposit), incur less maintenance and have the flexibility to relocate at the end of the lease term.

Interestingly, most large Texas cities far exceed the national average of renters vs. homeowners. While Texas averages about 44% of household heads who rent, nationally this is only about 36%. As housing value increases continue to outpace income increases, renting will be more affordable and desirable. Currently, there are about 137 million housing units nationwide. With all this being said, it is a bit of an unfair comparison, since 33% of U.S. household heads paid more than 30% of their income for housing, while 47% of tenants did so.

Marc Moffitt
Adjunct Professor of Real Estate
G. Brint Ryan College of Business
The University of North Texas

In your opinion, what does the real estate market have in store for Texas in 2020?

Texas will continue to experience strong demand for housing in 2020. We continue to lead the nation in job growth, and the quantity of employers relocating to the Lone Star State continues to grow as well.

For the past 10 years, Texas has averaged approximately 1,200 people a day in population growth. The impact of this sustained population growth is that every one of those new residents will need a place to live.

With strong demand and historically low interest rates, single-family home prices will continue on an upward trend for the foreseeable future.

Housing affordability will continue to be a struggle for many first-time homebuyers. Even with record-low interest rates, the monthly payment required to purchase a first home remains out of reach for many.

Would you recommend buying or renting in the largest cities in Texas this year?

One of the major benefits of homeownership is the ability to lock in your cost of housing at the current market price. Given that home prices will continue upward for the foreseeable future, I would recommend purchasing if it’s an option financially.

Buyers in large metro areas will continue to benefit from rising home values due to increased housing demand and job growth.

The bottom third of the market will continue to see the biggest gains as first-time homebuyers and investors continue to compete for the same properties.

Nationwide, Texas remains a bargain for luxury homes in metro areas. There are very few major cities across the nation where you can buy a large, luxury home in a great urban location for less than $1 million. One million dollars still goes a long way in Texas.

Luis Bernardo Torres
Research Economist in the Real Estate Center
Texas A&M University

In your opinion, what does the real estate market have in store for Texas in 2020?

Low mortgage rates and steady employment growth will support ongoing housing demand in 2020, resulting in a greater number of sales and higher prices than in 2019.

On the supply side, increased single-family permits, housing starts, and lot development indicate positive momentum for construction in 2020. Builders are trying to build homes priced from $150,000 to $350,000.

The strong run-up in single-family home prices over the past few years will reduce affordability because household incomes are increasing at a lower rate than prices.

Texas’ apartment markets should continue to perform well in 2020 given the low inventories of starter homes available for purchase by young adults. Millennials, still in their 20s and early 30s, continue to show more interest in leasing than buying. Consequently, vacancies should remain relatively low and rents will continue to increase.

Read more about this year’s outlook in 2020 Texas Housing & Economic Outlook.

Would you recommend buying or renting in the largest cities in Texas this year?

It depends on a majority of factors like lifestyle, location, age, marital status, family size, income, job tenure and security, home prices, interest rates, taxes, and motives (investment or/and shelter) to purchase a home.

Research at the Real Estate Center regarding purchasing a home versus renting and investing showed that, in the long run, purchasing a home offers a greater return than renting and investing the difference in the stock market.

Sriram Villupuram
Director, Ryan-Reilly Center for Urban Land Utilization
College of Business
The University of Texas at Arlington

In your opinion, what does the real estate market have in store for Texas in 2020?

I expect the housing market in Texas cities to outperform the rest of the nation again in 2020 in terms of price appreciation. The state and local tax deduction limit will continue to dampen the price appreciation of homes in the upper price range, whereas homes in the lower price range will experience healthy appreciation through 2020.

Would you recommend buying or renting in the largest cities in Texas this year?

I would still recommend buying a home in the largest cities in Texas. Buying beats renting in all large Texas cities given that a resident stays in a home for a certain minimum period of time. For Austin, buying is cheaper than renting after 3 years, whereas the break-even is even shorter (around two years) for Dallas, Houston and San Antonio. Also, Dallas is expected to outperform the other large Texas cities in 2020 in terms of price appreciation primarily driven by the arrival of small to mid-sized firms.

Strong, sustained demand will push home prices higher, meaning housing affordability might remain an issue for first-time homebuyers. But on the plus side, increased single-family permits, housing starts, and lot development indicate construction is really taking off in 2020. And as some of our featured experts pointed out, developers and builders are trying to focus more on expanding the affordable segment. Therefore, first-time as well as repeat homebuyers might have a lot more housing options to choose from in the future.

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