What experts say could cause real estate crash
By Jenny Rudolph
Fort Worth Star Telegram
June 26, 2023
Republished with permission
Fort Worth’s housing market this spring has been whipsawed by some bruising forces — surging interest rates cooling demand, yet not enough listings for people looking to buy. Some softening on prices, but persistent concerns over affordability. The drama over the nation’s debt ceiling, along with the threat of a looming recession. But despite the battering, the homebuying market in the Metroplex has proven to be resilient. Prices are continuing a slow climb, though down from a year ago as of May. Active listings are up 47% in Fort Worth and Tarrant County, and more than 100% in neighboring Parker County, according to the Greater Fort Worth Association of Realtors. And closings on homes in Fort Worth in May were nearly level with a year ago. If the economic uncertainty that we’ve seen in 2023 hasn’t been enough to derail North Texas’ housing market, what would it take to cause a true crash? Chris Kelly, the executive chairman of the Ebby Halliday Companies, has one idea.
“For the economic conditions for that to happen,” he said, “you would have to see probably a very deep and severe recession in which unemployment went up dramatically, causing lots of unemployment to where people were having to force-sale real estate at a level that outpaced the number of people that are still moving to North Texas.” That could happen, Kelly said, but it is extremely unlikely given the economic conditions today in North Texas. For months, the Federal Reserve has hiked interest rates to slow spending and inflation. Some economists don’t think a recession will occur, while others predict a mild one could lead to additional layoffs and decreased spending.
If a recession hits, Kelly and other experts agree it won’t be a severe one with high unemployment like during the 2008 financial crisis. Experts also agree North Texas will fare better than the rest of the U.S. in a recession because of its diverse economy and strong population growth. Arben Skivjani, deputy chief economist and director of forecasting at RealPage, said any recession would be fairly mild. “If it happens, it will be towards the last month of the year,” Skivjani said. “Employment has been slowing down, but when you have 200,000 jobs being created in one month, that’s pretty healthy.” Skivjani also said the strength of the economy is sometimes more about perception than reality.
“One of the major threats is uncertainty: What’s going on with the debt ceiling, wars around the world and such,” Skivjani said. “Uncertainty makes people uncomfortable. When folks are uncomfortable and they don’t feel good about what’s going on, they limit their spending.” Mark Dotzour, former chief economist at Texas A&M’s real estate center, said he has been monitoring the Texas real estate market for nearly three decades and sees “no chance” of a housing crash in North Texas. “The reason for that is there’s just no inventory,” Dotzour said. Dotzour said a normal housing market has about six months supply of listings to meet current buyer demand. That amount is lower in North Texas right now. In May, Fort Worth had two months of inventory, meaning it’s still more competitive among buyers. Home prices would start to fall if supply reached 10 to 12 months, making it more of a buyer’s market.
“We haven’t seen that in decades,” Dotzour said. “So the lack of inventory is going to preclude any kind of dip in prices.” Meanwhile, population growth isn’t slowing. The Metroplex is home to nearly 8 million people, but by 2045 that number could increase by 3.4 million, according to January forecasts from the commercial real estate agency JLL. “You’ve just got this enormous surge of people, this relentless surge every year for the last two, three decades of people moving in and we just can’t build enough homes to keep up with them,” Dotzour said. “So the supply and demand thing is never going to catch up.”
Kelly, the CEO of Ebby Halliday Companies, said one of the reasons North Texas has a low inventory of homes is because so many people have a lot of equity in their property. They’re sitting on low mortgage rates and don’t want to sign new mortgages at current rates. “Those people are not just going to willy-nilly, voluntarily go out and buy or sell their property for below market value so that they can be homeless. So the conditions that are keeping inventory down are also the conditions that are going to keep home values from collapsing.” Experts agree that if a housing crash were to occur, it would have to be due to a national economic disaster, not isolated to North Texas.
Bud Weinstein, a retired SMU economist, said a major macroeconomic event like a default on government debt could cause a housing crash. The U.S. has a $31.4 trillion debt ceiling, which limits the amount of money the government can borrow to pay off existing debt. After months of negotiations between officials in Washington, President Biden signed a bipartisan agreement in early June. The deal suspends the debt ceiling until 2025. Failure to reach a deal would have had “catastrophic” effects on the global economy, experts say. It would have negatively impacted financial markets and meant the U.S. would be unable to provide social services payments to seniors and veterans. Just one week’s default could have caused a loss of 1.5 million jobs, according to Moody’s Analytics.
“If the government is unable to pay its bills and that pushes us into a serious recession or even depression, that would cause housing prices to collapse,” Weinstein told the Star-Telegram back in May. “It would cause everything else to collapse as well. That’s kind of an Armageddon scenario. I don’t see that happening. If there are developments that cause housing prices to collapse nationally, that will happen here too. We have a strong economy, but we’re not completely insulated from the rest of the country.” Daniel Oney, research director at Texas A&M’s real estate research center, told the Star-Telegram in May the U.S. defaulting on its debt would negatively affect the housing market anywhere, but he would expect Texas to fare better. Last year Texas had the highest domestic and international net migration the state has seen in a decade, Oney said.
“People tend to focus on these sudden events impacting the economy, but it’s really the longer-term changes,” Oney said. “A region doesn’t become poor and hollowed out overnight. If you look at cities in the Midwest that started going into economic decline, loss of manufacturing and all that, that’s a process that started sometimes as far back as the 1950s. It takes a couple of generations for something like what you would see in a St. Louis or Detroit.” The Metroplex’s growth and investments in infrastructure wouldn’t wipe out overnight, Oney said. “Even if North Texas had a major shock, the region is in a good position to recover,” Oney said. “I always kind of discount those immediate horror stories and crashes and so forth. We’re likely to see gradual changes over time or a shock and then the economy recovers from it.”