Houston Real Estate Market Report: Fall 2023

I said in my summer report that I thought fall 2023 would be tough. I underestimated how tough. Freddie Mac’s Primary Mortgage Market Survey (PMMS) for the week of October 26th came in at 7.79%, the highest reading since November 2000. The 10-Year Treasury yield crossed 5.0% in October for the first time since 2007, and the mortgage market, which prices off that benchmark, followed. The Mortgage Bankers Association (MBA) purchase application index hit levels last seen in 1995. This is the statistical low point of the current cycle, and I am saying that not with confidence but with the observation that this is what the data shows. Cycles do not necessarily bottom when you think they should.

Houston Association of Realtors (HAR)’s October report confirms what I was seeing in practice. Houston closed sales were down approximately 14% year over year. Active listings were up to 25,000, the highest in several years. Months of supply crossed 3.3 in October. Days on market has extended to 55 days on average in Harris County. Median price has held at around $315,000, which remains the puzzle of this cycle — volume is collapsing while prices are stubbornly supported by the inventory constraint that the lock-in effect has created. Sellers who have to sell are accepting the market reality. Sellers who do not have to sell are staying put. The result is a market that is functionally frozen rather than genuinely distressed.

I Was Wrong About One Thing

In my Summer 2023 report I predicted “first meaningful rate relief: Q1 or Q2 2024.” I want to revisit that prediction. The Federal Open Market Committee (FOMC)’s November meeting produced no rate increase, which is the right call but does nothing immediately for mortgage rates. The CME Group FedWatch Tool tool is now showing futures markets pricing in meaningful rate cuts starting in the first half of 2024 — as many as three or four 25-basis-point cuts. The market is more optimistic about the rate trajectory than I was in August. If the futures market is right, my prediction about Q1–Q2 relief may prove accurate for different reasons than I expected. But futures markets have been wrong about the Fed this entire cycle, so I am holding my conviction lightly.

The Builder Incentive Race

In the northwest master-planned markets I am watching closely, builder incentive packages have reached a level I have not seen in the relatively short time I have been in this business. Builders in Bridgeland, Marvida, Cross Creek Ranch, and Cinco Ranch are offering combinations of: mortgage rate buydowns of 2–3 points, closing cost coverage of $10,000–$20,000, appliance and upgrade packages, and extended price locks for buyers who need time to sell an existing home. The total value of these packages is in some cases $30,000–$40,000 above the base contract price. Resale sellers in the same communities who are not competing with equivalent concessions are simply not getting offers.

Outlook for Winter 2023–2024

Winter will be slow. That is seasonal and cyclical combined, and the combination does not produce an active market. What I am watching for is whether the rate cut narrative that is building in the bond market and in FOMC commentary translates into real buyer psychology shift by January–February 2024. If buyers start acting on the expectation of lower rates — locking in now at 7% with a plan to refinance — winter could be a window for buyers who are willing to accept current rates as temporary. Sellers: if you need to sell, price for the market that exists, not the market that existed in 2022 or the market you are hoping for in 2024. The buyers who are active in December and January are informed, patient, and not going to overpay.