More Evidence of Texas’ Housing Market Strength

In a previous post, I talked about how the residential real estate market in Texas has appeared to have formed a bottom and is beginning to recover. The following chart shows that the dollar volume of home sales in Texas has recovered. Total sales of nearly $40 billion were reported to the Real Estate Center in 2011, very similar to 2004 before sales spurted in 2005-07 because of greatly relaxed underwriting standards.

As I look at this chart, it appears to me that sales volume has stabilized around $40 billion for the past three years. Early results indicate that 2012 will show a substantial increase.

The inventory of homes for sale is another indication of stabilization in the residential market. If there is an excessive amount of homes for sale, the risk of price declines is higher. When inventory gets lower, prices start to rise.

The next chart shows the number of listings for sale in Texas as reported to the Center. The first thing you see from this chart is that the amount of homes for sale is predictably seasonal. Lots of houses are put up for sale in the spring and summer months. There are fewer homes for sale in the fall and winter every year.

The second thing you can see is a downward trend in the inventory after the historic peak of 31,431 in June 2006. Five years later, the number of listings in June 2011 was 21,771. The number of houses for sale had declined by 31 percent. The June 2012 inventory numbers will come out in the next 60 days.

Another way to look at inventory is the number of “month’s inventory.” This is a theoretically simple calculation. If you have ten homes on the market and you sell two each month, then you have five months of inventory. Previous Center research has estimated that in Texas a balanced market is about 6.5 months of inventory.

What we have observed in the past 15 years is that if inventory levels are below 6.5 months, prices rise more quickly. When inventory levels get above 6.5 months, price appreciation begins to moderate. The danger of falling prices comes into play when inventory gets into nine to 11 month range.

What you can see from the chart above is that inventory of Texas homes for sale was below 6.5 months for the first eight years of the 21st century. Home prices in Texas were increasing consistently during this period.

This indicator of residential market conditions rose above 6.5 months in May 2008 and stayed above that level through November 2011. Since then, the inventory has been hovering around 6.0 months. This is a clear sign of relative strength in the price of houses in the Texas market.

Keep in mind that home price trends can vary dramatically from one city to the next in any state). In fact, price trends can vary widely between neighborhoods in the same city.

So it’s possible that prices could continue to be soft in pockets around the state. But the economic foundation of a recovery in residential real estate is being laid.

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