Home affordability decreases in Texas
Sep. 10—Texas homes are becoming less affordable, according to a new report by the Texas Real Estate Research Center.
While still affordable compared to many other parts of the country, income levels are falling short of rising home prices, the report found.
"Texas still remains affordable for homebuyers relative to other large areas, think about cities on the East and West coasts, however, it's diminished slightly," said Clare Losey, TRERC assistant research economist and author of the report.
Jeanie Belcher of Integrity Real Estate Brokerage in Palestine said that prices have brought property values up to a more reasonable level.
"It's still more affordable to buy a house here than a lot of other places in Texas," Belcher said. "But housing was so low here for so long. It seems to be catching up to where it needs to be."
"We also saw a huge shift during COVID where people could afford more," said Jodi Davis of Combined Associates Real Estate in Palestine. "When everything went back to normal and people could no longer work and live wherever they wanted, we're seeing it slowly shift back."
The Housing Affordability Index compares the family income necessary to purchase a median-priced home. When the price of a home outpaces the average family income, homes become less affordable. Holding a ratio of 1.0 means a family income is exactly sufficient to purchase a median-priced home; a number below 1.0 means housing is less affordable.
In Texas, housing affordability declined year-over-year causing the gap between median sales price and family income to rise, Losey said.
In 2020, the statewide affordability ratio was 1.78, it declined to 1.53 in 2021 and now sits at 1.22 in 2022, data shows.
The report also looks at major metropolitan statistical areas and large counties across the state.
In 2021, every Texas MSA and county that was studied had an affordability index above 1.0. In 2022, at least four studied MSAs and counties fell before the 1.0 threshold, while one, Denton County, sat at exactly 1.0.
Counties that fell below the affordability threshold most significantly were Travis County, home to Austin and Collin County, home to Plano. Travis County reported an index of 0.83 while Collin County reported an index of 0.84.
Kerr County, southwest of Travis County, reported an index of 0.95, while the Austin-Round Rock MSA reported an index of 0.96.
Wichita Falls and Odessa remained the most affordable places to live with indexes of 2.1 and 2.06, respectively.
"Affordability has been diminishing for homebuyers since the end of the Great Recession," Losey said. "However, it became an even larger concern and became more prevalent during the pandemic."
Losey also said the average annual appreciation on a Texas home is about 4% to 5%. Since the start of the pandemic, home appreciation rose upward of 20% year over year, but median incomes, which rose an average of 0.81% between 2020 and 2021, have not kept pace.
"The household income growth just hasn't kept pace with the increase in home prices, and it's widening the gap between home prices and household income," she said. "As that gap widens, affordability diminishes."
Belcher said East Texas appears to be holding steady.
"Obviously a rise in prices would widen the gap," Belcher said. "But we are still getting a lot of prequalified buyers."
Losey attributed the decrease in affordability to two reasons: rising mortgage rates and strained supply.
RISING MORTGAGE RATES
Experts say rising mortgage rates is one of the greatest factors in decreasing affordability.
In an effort to stifle rising inflation, the Federal Reserve has raised its federal fund rate, an interest rate used by banks when borrowing and lending to each other. While the federal interest rate is separate from mortgage rates, they are tied together in that when the Fed raises its rate impacting banks, mortgage lenders typically follow suit.
The national average for a 30-year fixed mortgage rate was about 5.22% in August. At the height of the pandemic in December 2020, mortgage rates were set at 2.68%, the lowest rate since the 1980s.
"Of course when interest rates go up it makes it more difficult to purchase or afford a home," said Lisa Priest of Picket Fence Realty in Palestine "But the truth is interest rates are still very good right now even though they have gone up."
Increasing rates then raise the cost of buying a home with a mortgage, which makes it more difficult for buyers and particularly first-time homebuyers to enter the market as they need larger down payments to contend with the rising rates and rising prices.
"Although Texas does remain relatively affordable, it is not necessarily affordable to those that are indigenous to the state of Texas," said Roger Arriaga, executive director of the Texas Affiliation of Affordable Housing Providers.
SHORT SUPPLY
Texas' housing real estate market has been in short supply since long before the pandemic, experts said, but the pandemic certainly exacerbated the problem.
The pandemic stifled supply chains leading to an increase in the cost of lumber and building materials. It also forced staffing shortages across industries. This led to an increase in the cost and time it takes to build a home, not only impacting supply but exacerbating prices.
"The housing shortage created such a huge competition in purchasing," said Bill Head, director of communications MetroTex Association of REALTORS. "That in itself created an increase in sale prices and in many cases, in most of the areas in North Texas, the sales price was higher than the appraised price, which is very uncommon."
East Texas is seeing very little new development at this point, but signs point to an upward trend.
"There is some new construction locally," Priest said. "But it's one or two here and there, not big developments."
Texas is also bringing in economic development with major announcements from global corporations such as Tesla, Samsung, Texas Instruments and many more. The establishment or expansions of these major headquarters brings economic development and jobs to the area, but those people need homes, further straining housing supply, Head said.
Head likened the current housing market to "a perfect storm," where low supply, rising prices and rates, and an influx of new Texans are all playing a role in the state's affordability.
"Buyers are predominantly coming in from out of town," Davis said. "We need more housing."
A RIPPLE EFFECT
Experts warn that a decline in affordability has a ripple effect across multiple aspects including reduced health outcomes, an increase in crime and one's ability to build wealth.
According to the Texas Affiliation of Affordable Housing Providers, almost half of Texans are spending more than 30% of their household income on housing costs, deeming them cost-burdened.
The rising cost of rent, combined with other potentially overwhelming debts such as student loan debt and now inflation and rising home prices are pushing buyers, and especially first-time home buyers, out of the market.
The delay in purchasing a home often leads to a delay in starting a family and a delay in one's ability to build wealth. And if one does not believe they can buy a home, have a family and financially take care of that family in Texas, they may not take a job, impacting the workforce, said Russell Berry, chairman of the Texas Realtors.
"Businesses that are coming from outside of Texas, they're looking for a workforce," Berry said. "Workforce needs housing, and at some point, when we tip the scale of affordability, the workforce housing has to go into apartments and has to rent, and they will not see that wealth that they can get from buying a home."
Berry added that he can see it becoming a problem.
Ultimately, Arriaga, Losey, Berry and Head said increasing supply is the likely best way to ensure Texas remains affordable.
"If all else is equal, if we can expect inflation will stay with us for a while longer, interest rates are not going to go back down to the record levels they were, then really the only thing we can count for is more supply," Arriaga said.
