Houston Real Estate Market Report: Summer 2023

I got one thing right in my spring outlook and one thing wrong. I predicted summer rates would hold elevated without spiking further. Wrong: Freddie Mac’s Primary Mortgage Market Survey (PMMS) climbed back to 7.09% the week of August 17th, approaching but not quite matching the October 2022 peak. I predicted the market would hold where spring was. Mostly right: Houston Association of Realtors (HAR)’s July report shows Houston median price at approximately $325,000, flat with April, and active listings hovering around 24,000. Volume is still down year over year but the decline has stabilized.

The encouraging piece is the inflation trajectory. June Consumer Price Index (CPI) came in at 3.0% year over year — down from the 9.1% peak fourteen months ago. July ticked up slightly to 3.2%, which was disappointing but not alarming given the comparison base. The Federal Reserve raised 25 basis points at the July 26th meeting, bringing the target to 5.25–5.50%, and most market observers believe this is the last hike or very near the last. The CME Group FedWatch Tool tool shows futures markets pricing in a pause at September and potentially through the rest of 2023. That does not mean rates fall — the Fed staying at 5.25% does not automatically bring mortgage rates down — but it does mean the ceiling may be in view.

Houston Employment: The Consistent Cushion

The Greater Houston Partnership’s mid-year report shows Houston added approximately 92,000 jobs in the twelve months ending June 2023. That is a pace of growth that keeps housing demand above zero even when rate effects suppress transaction volume significantly. The energy sector is the wildcard as always — West Texas Intermediate crude (WTI) has been in the $70–80 range this summer, which is not a boom but is not a bust either. The medical center and healthcare sector is the most interesting employment growth story right now: TMC3 development and the continued expansion of multiple hospital systems is generating professional housing demand that I expect to intensify over the next several years.

U.S. Bureau of Labor Statistics (BLS) data for the Houston Metropolitan Statistical Area (MSA) shows unemployment at approximately 4.2%, in line with national averages. There is no recession signal in the Houston employment data, which matters because housing corrections tend to require real economic stress to turn into price corrections rather than volume corrections.

Who Is Buying Right Now

I want to be specific about the buyer profile that is active in this market, because it is different from 2021–2022. Cash buyers and high-equity buyers are doing a disproportionate share of summer 2023 transactions. Physician mortgage borrowers — who can exclude student loan debt from debt-to-income (DTI) calculations — are active in the inner-loop and south-side markets. Corporate relocation buyers on employer timelines who do not have rate flexibility are still moving. And investors who see a moment when competition has thinned are quietly acquiring in corridors with strong rental demand fundamentals.

The first-time buyer using conventional financing at 7%+ is largely absent. This is a problem for entry-level inventory absorption and is part of why the under-$300,000 market in Houston’s suburban corridors is softer than the median-and-above market.

Outlook for Fall 2023

I am going to make a prediction I am not fully confident in: I think fall 2023 is going to be tough. The back-to-school slowdown is seasonal and expected, but on top of rates that have re-approached 7%, I think we see a further pullback in buyer activity through September and October. If the Fed pauses in September as expected but rates stay elevated because the bond market is not yet convinced of a rate cut timeline, the psychological effect of “rates are done going up but they’re not coming down either” could actually keep the market in stasis longer than a simple “rates fall, buyers return” scenario. My best guess for the first meaningful rate relief: Q1 or Q2 2024, assuming inflation continues its decline. I will happily be wrong earlier.