Real Estate Market Update

Uncertainty tends to stall investment markets, but it has fueled our real estate market for the past two years. Individual home buyers and investors have channeled their funds into residential real estate to park it in an arena where they feel more confident than the stock market or small businesses that were so severely punished by restrictions and mandates during the COVID era. Over time, real estate tends to hold onto its value, and our Greater Houston market (average across the board) has appreciated around 15% per year over the past two years.

Investment confidence is only one factor that has kept our real estate wheels turning. The main factors driving the high demand are strong local “move up” demand, domestic and international relocation to Texas, and low-interest rates, aided by the need for larger homes by people that now work from home and may educate children at home. The high demand has depleted inventory, driving home prices even higher. “Home sales throughout Houston continue to trend upward despite the challenges posed by limited inventory, record-setting pricing, and rising interest rates,” said HAR Chair Jennifer Wauhob in the April 2022 HAR market report.

Interest rates are rising quickly, advancing from 3% to 5.5% in just a matter of months. Not a time to freak out, however, as 6% is actually a very reasonable interest rate. Over the past 50 years, the average 30-year fixed-rate mortgage interest rates ranged from 6% to 17% until they dove under 5% in 2008 and got as low as 3.6% (on average) before the recent increases. Lower interest rate loans will still be available in the form of adjustable rate mortgages (ARMs) with initial fixed-rate terms of 5, 7, and 10 years and rates currently starting around 4%.

The first effect of these increased rates that we are feeling is the reluctance of homeowners to sell a home with a low-interest rate mortgage, even if they will realize significant appreciation on their home when they know they will pay a premium price for a new home and pay a higher interest rate on the new mortgage. This has been a major influence recently on low inventory levels, which is causing existing buyers to continue to pay premium prices in multiple offer situations.

The effect is less significant on the luxury market, especially as we get over $2 million, where cash purchases are more common, and more cash is available for renovations after purchase. This should result in the luxury market leading the way in 2022 sales.

Don’t let fears of a pricing bubble or rising interest rates stop you from purchasing the new home you need. Real estate is still a great investment and one that you get utilitarian value from while it appreciates in value.