Dallas, Texas, is making headlines right and left these days – both for its booming housing market and for the potential problems many analysts somewhat contrarily insist that the city’s housing boom represents. Last week, while about a dozen buyers spent the night camping out to get first pick on about 80 new Dallas-area homes and secure the privilege of getting their “highest and best” in before anyone else, CoreLogic released a troubling report indicating that the Dallas-Plano-Irving market might be among the most over-priced in the country. While one buyer was happily telling her daughter what a good investment they were making thanks to growth and appreciation in the area, top economists were pointing out that skyrocketing home prices across Texas and in the Dallas area in particular are making the market distressingly susceptible to decline should the region experience an economic downturn or should interest rates start to rise. Fortunately, the “fine print” of the Dallas market’s meteoric rise (better than 14 percent appreciation in the past year in many parts of the city) is actually quite reassuring assuming an investor in that market is willing to track local trends and read the signs diligently.
Analysts who are concerned about the Dallas housing market’s stability cite what CoreLogic chief economist Frank Nothaft has referred to as “brisk appreciation” in the market based on a booming population and increasingly tight housing inventory. The key to identifying a potential bubble forming is to determine the source of these factors and others, and then evaluate whether or not the market is actually in any immediate danger. Strictly by the numbers, the Dallas market does represent a greater risk than some other regional markets simply because it has gone so high so quickly. In the event that a sudden economic shift occurs – say, mortgage rates rise dramatically or a main source of employment and population growth dries up – then the Dallas market would certainly take a harder hit than one that has been appreciating more slowly and steadily over time. The real question: is that sudden, negative economic shift particularly likely to happen and, if so, when?
According to Dallas’ own Federal Reserve experts, Texas housing as a whole is powered by a host of advantages over other states, such as a relatively low tax burden and, more importantly for investors, a flexible labor market. Flexible labor not only indicates that a market is highly adaptable, which is a positive trait whether a market is flourishing or recovering, but also that the market is characterized by corporations and industries that quickly respond to changes in the economic climate in order to remain profitable and that the labor force is willing and able to freely move between jobs as the economy dictates. As far as Dallas goes, this flexible characteristic indicates that the threat of a negative economic shift – say, falling oil prices – is mitigated as far as fallout goes because the labor force is highly adaptable and is likely to remain active and engaged despite a downturn in any one given industry. In the case of falling oil prices, that particular example has clearly played out as many economists warned that Texas as a whole and its major metros in particular would likely suffer when oil prices fell. While the Dallas Fed predicted this past March that Texas job growth and, by extension, home sales volumes and home prices, would slow over the course of this year in response to falling oil prices, at present, home sales and employment numbers are stronger than they were a year ago when oil prices were hovering around $100 a barrel.
So does this mean that the Dallas housing market is impervious to oil price fluctuations? In an optimistic world it might, but successful investors seldom err on the side of optimism. Instead, it would probably be safer to say that falling oil prices have not been felt in the area yet and move on to other indicators that investors and economists are watching. Since population growth depends to a great extent on employment, the jobs market is likely where the first signs of trouble for Dallas will appear, should they do so. According to the U.S. Bureau of Labor Statistics, Dallas employment has risen 3.7 percent this year so far, well above the national increase of 2.1 percent. In fact, the city ranked first in the country for rate of job growth and third in the number of jobs added (more than 3.3. million in the past 12 months). Interestingly, although oil-sector jobs did decline during that time period as many economists expected, other professions added enough jobs that they counter-balanced the losses. It is noteworthy that manufacturing and information jobs both are on the decline in the area. This could represent a potential problem in coming months since information jobs tend to create many other jobs and the loss of this type of job could affect job growth over time, but the decline likely simply represents a heightened environment of competition rather than a seriously problematic trend since most major metro areas are presently competing for these individuals and Texas, in particular, is a hotbed of competition for these professionals. Over time, however, if the information sector’s population continues to decline in Dallas, the market could certainly soften.
The final thing real estate investors should watch in the Dallas area is the new-construction trend. Compared to the national housing boom in the early 2000’s, builders are keeping their cool in Dallas. However, with would-be homeowners camping out, literally, in hopes of bidding high and early on the new homes of their choice, things could spiral out of control quickly. Adding to the potential for overbuilding, apartment renters are getting slammed with record rent increases, which is driving more renters toward homeownership. That is definitely good news for builders and investors today, but keep a close watch on this trend. As of Q2 2015, new home starts in the Dallas area were up nearly 10 percent year-over-year. Many of those homes are priced above the present median home price (around $200,000), an issue which is creating an inventory crunch at the bottom tier of the market and setting up a scenario in which the upper tiers are overstocked and home values could fall.
Last week, CoreLogic analysts warned that over the next few years the housing market in Dallas could become unsustainable thanks to rising home prices and the increasingly-large amounts of monthly income that homeowners in the area must dedicate to their mortgage payments. However, the same analysts noted that the CoreLogic Home Price Index indicates that on average, Dallas homes will be “fairly valued” through the end of 2017. Therefore, as long as a Dallas investor watches the market closely for signs of softening and is careful to prepare multiple exit strategies for each deal, that individual should be able to turn a nice real estate investing profit in the Dallas market for some time to come. It would be a shame to forego thriving in such a dynamic and diverse housing market out of fear of a bubble that is likely to materialize slowly or perhaps not at all.
Carole Ellis is editor of and chief market analyst for REI.today, a real estate research publication focused on identification of burgeoning trends and market factors that accelerate wealth accumulation for real estate investors. To see Carole’s latest list of Hot Topics for savvy investors, visit http://www.REI.today or email her at firstname.lastname@example.org.