Have we seen the bottom of the housing market? In my opinion, NO. And although the Texas economy, specifically the Austin metro area, is still fairly vibrant, we are continuing to see declines in both number of homes sold, and price/sf. The "mortgage crisis" that has taken center stage the last few months will be corrected, and fewer homes will be sold because part of the correction will be a RETURN to legitimate methods by lenders to qualify potential home buyers! So where's the bottom, and when's the rebound?

Although every area of the country has "reasons why" their home market is down, I believe the answer(s) are somewhat generic as far as "bottoming out" and "rebounding". I'll cover these first, and then briefly mention my thoughts on a Texas specific "rebound" at the end. 

What Has to Happen?  

Two major events have to occur before the housing market will begin to bottom out. First, home prices have to stop falling, and second, investor confidence in the traditional U.S. residential mortgage must be restored. What must happen for home prices to stop falling?

The answer is a painful process. Prices fall when there are more houses for sale than there are buyers who want to buy (or can afford to buy). The abrupt "nuclear event" that occurred in July 2007 (see "Wall Street Implosion Causes Nuclear Explosion") shut off a substantial amount of demand for new homes almost overnight. The large group of low income home buyers that was active in the market in June 2007 was gone completely the next month. Meanwhile, new homes were still piling into the market. The excess supply has continued to grow as foreclosed homes are put on the market. This overwhelming imbalance of supply and demand caused prices to fall.

Prices will stop falling when the excess supply is eliminated from each local market. This can happen in only one way. First, new construction must be reduced to virtually nothing. This actually began in the Austin area last summer, as New Home Builders began renegotiating their "take-down" schedules on lots from developers,and started various "Buyer incentive/discount" programs. The relentless population growth in most of America will ultimately absorb the excess inventory. The inventory of unsold homes will decline until selections get too limited to meet the needs of picky home buyers. At this point the market will begin to shift from a buyer's market to a seller's market. Prices will stabilize, and the market will begin to heal itself.

How Long to Heal?

The pace of this turnaround will vary from city to city. If home builders cut back dramatically on new supply, the recovery will occur faster. Communities with fewer foreclosures will work through the excess supply more quickly. Communities like Austin, Texas, with strong job and population growth will create demand that will absorb the excess units faster. Conversely, communities with slow job growth could take years to bounce back from the excess supply. Political action could change the timeline as well. If the Federal government were to offer tax credits for people to buy homes, the excess inventory could be soaked up even faster. This would cause the housing market to bottom and turn around much faster.

Another stimulus that would speed the recovery is gently rising mortgage rates. Typically, when mortgage rates are falling, homebuyers postpone buying. But when they see that mortgage rates have stopped declining and may rise, they hop off the fence and buy. As the economy begins to rebound in 2009, look for mortgage rates to take an upward turn. As long as rates do not increase dramatically enough to impact affordability, this should stimulate housing demand.

What About Texas?

The long-term outlook for the Texas housing market is clearly strong. In the 1970s and 1990s, house prices in Texas rose in nine out of ten years. And even in the 1980s - the most challenging decade for Texas in the past 38 years - house prices increased eight out of ten years.

Job growth in Texas has doubled the national average for most of the past ten years. Demographic experts estimate another 13 million people will live in Texas by 2030. Many Texas cities still have tight inventories of homes for sale with prices continuing to appreciate. The state's metropolitan areas have strengths and weaknesses in their local markets. Attractive properties located in older neighborhoods close to downtown, like Hyde Park and Tarrytown in Central Austin, are still performing well and will continue to do so. The challenges in big city housing markets will be in select sections of the suburban perimeter. In the short term, these markets will struggle because too many new homes have been built. Even in the hot home markets around Austin, like Round Rock, where home sales have been very good, sales have dropped off substantially since the first of the year.

But even in these areas, supply is being quickly withdrawn as new home starts plummet. It may take a few years for these areas to return to a balanced supply. For now, builders are accepting substantial concessions to make a sale. If you plan to buy a house to live in for a number of years, this would be a great time to buy. If you think you may not live in a house for two years before you move again, you might be better off to rent.

For a comparative market analysis of the Austin, Texas, metro area, contact Phil Hutson @ (888) 410-5858 or phil@showcaseofhomes.com