Wages, Home Prices, and Dallas Market Dynamics: An Interview With First American’s Mark Fleming

This is Mark Fleming, the Chief Economist at First American, who tells us the market capacity for existing home sales is increasing, up 1.3% in April. That’s good news: what it means is that more Americans can afford to buy homes because of strong employment. But we are still having a problem with supply, not just here in North Texas, but pretty much everywhere, because sellers are selling high to cover insufficient equity:

“The fact that actual existing home sales volumes were lower than market capacity, yet house prices are increasing, indicates that the market is experiencing supply constraints more than demand constraints.  While individual homeowner equity positions are improving, many homeowners still have a higher than market reservation price, or the price at which they are willing to put their home on the market for sale.  Without the constraint of insufficient equity, many more homeowners would be willing to sell their homes, especially given the continued low interest rate environment and increased certainty in labor markets.  Since the end of the recession in 2009, the market’s capacity to support sales activity has almost doubled, but is now significantly constrained by the pent-up supply,” said Mark Fleming.

Existing-Home Sales numbers were released today, and the housing market continues to underperform given current market fundamentals.

“Homeownership levels are the lowest they have been in a quarter century, and household formation growth has almost exclusively been in rental households for the last six years.  Yet, this doesn’t necessarily mean that overall demand has fallen significantly.  That’s because Millennials, the largest generation in sheer numbers, who have been the source of a lot of the recent rental household formation, are now entering their prime first-time home-buying years. This generation is even larger than the baby-boom generation that was the generational homeownership engine of the last 25 years,” noted Mark Fleming.

It’s hard to be a buyer if you cannot first be a seller, says Mark, but the big increase in actual sales in March began to close the gap between actual existing homes sales and the market capacity for existing home sales. Home ownership levels are now at their lowest in 25 years, but an increase in actual sales in March began to close the gap between actual existing home sales and market capacity. Whenever I read this national stuff, I always wish I could have a hot line right into the guy who’s being quoted ear ans ask — but what about us? The Dallas market is doing pretty damn well and we have not had the volatility of other markets so please, Mark baby, let’s be more Dallas specific. So I asked:

CD: How much of these market fundamentals evolve from government policy? For example, the tightening of the mortgage market after the recession resulted in fewer home purchases particularly with the millennials and first time homebuyers. Mortgages are still tight for the self-employed. Conversely, I believe that financing opened up like a groundswell for the commercial apartment market. Yet rents are going up like crazy, particularly in major cities.

Mark: While tightened credit standards and the available types of credit are playing a role in depressing demand, the simple fact that house prices fell so far and put homeowners in insufficient equity positions is more significant at the moment. Yet, the appreciation that we see in many markets today is exactly what the doctor ordered to solve the pent-up supply problem.

CD: The first-time homebuyer program: my children actually benefited from this, did other millenials? Where are they in the market today?

Mark: Alive and well. The GSEs and FHA have and, more appropriately, have always had first-time homebuyer programs. I believe it’s less an issue of capability than it is the willingness for people to become first-time homeowners today.

CD: Dallas was recently named the hottest real estate market in the country. We have about a 2.5 month supply of inventory in the highly sought after areas. Our average home price was once about $170,000, now it’s $200,000. If this trend continues, how will our millenials afford homes?

Mark: I don’t have data on Dallas, so I can’t speak specifically about the local market. However, in other markets and generally speaking, fast-rising home prices are usually caused by fast-rising wages. Otherwise, you’re right, Millennials won’t be able to afford the homes and prices will correct. Even through the last cycle, the market couldn’t sustain price growth without income growth eventually keeping it in check.

CD: San Francisco and NYC: pricing is out of control… I read that a tiny 291 square foot condo sold for $415,000 in San Francisco the other day after a bidding war! In less than a month?  What happens if this continues… by the way most of these hot sales in Dallas are cash buyers, because buyers with financing cannot get the appraisals to cover the loans on these jacked-up prices.

Mark: Wages in New York City and San Francisco are also very high. Remember that prices will respond to wage levels — maybe not perfectly and at all times, but over the long run. Salaries in New York City and San Francisco are some of the highest in the country.

CD: So we can be thankful we earn less in Dallas! Is our market in danger of crossing the point where we will no longer be affordable? I love the sanity of Texas real estate — it’s a smoother build up in values, not highly cyclical like CA and the sand states. We have less drama in our market but is that all about to change?

Mark: Affordability is best measured by measuring how many borrowers are becoming first-time owners. We need to look to the marginal borrower as the key to measuring affordability, as opposed to seeing whether the median-income person can afford the median-price home. Ask around and see if Millennials who want to buy are finding a way. If that’s the case, then it would seem an affordability crisis is not at hand.

The reason for Texas’ lower volatility is that there is a relatively unconstrained supply of land compared to, for example, California. When you have a supply of land to gradually add housing stock, you tend to have much less volatile housing cycles.

CD: Makes sense… thanks Mark!