2006 Texas Real Estate Outlook

Mark Dotzour, Ph.D., is chief economist and Jim Gaines, Ph.D., is research economist at the Real Estate Center at Texas A&M University. Below is their outlook for Texas Real Estate in 2006. You can also read this at TexasRealtors.com

The Texas housing market continued to be strong in 2005 just like we thought it would. A combination of positive job growth, low interest rates, and rising home prices in almost all Texas markets provided the fuel to keep the fires burning. Next year should bring more of the same. New housing starts should follow suit, possibly setting a record pace again in 2006.

Interest rates may increase a little bit, but not enough to discourage potential homebuyers. Often, rising interest rates actually encourage potential buyers to “get off the fence” and make a buying decision. The national economy should produce continued job growth in 2006, maybe at a little slower pace than we observed last year. The Federal Reserve has increased interest rates substantially in the past 18 months just for that purpose: to take a little of the edge off job growth and keep inflation in check. REALTORS® are big fans of low inflation, because that’s what keeps mortgage rates in low ranges. Whenever the Fed says it will not tolerate inflation, everyone in the real estate industry should send the Fed a thank you note.

Texas job growth should continue to expand. Texas is a very attractive place for businesses to locate. Low taxes, low labor costs, low housing costs and total cost of living, and the best Mexican food on the planet puts Texas at the top of the list for corporate relocation. The astronomical cost of housing in California in recent years has caused a lot of people to consider moving to Texas. Do you remember the last time this happened in the 1980s, when Californians flocked to Texas?

Home prices are likely to increase in most Texas metro areas in 2006 as well. Home prices tend to increase more rapidly when the local inventory of unsold homes is less than 6.5 months. Many Texas cities are well below this level. Expect prices to continue to appreciate at about the same pace that we’ve seen in 2005 in these markets with low inventories. Again, like we have been saying for the past three years, there is no real estate bubble in Texas.

What are the biggest risks for home sales in 2006? First, it is possible (but unlikely) that the Fed will increase interest rates high enough to cause a national recession. This would slow job growth and greatly reduce demand for houses. Second, federal regulators could issue stronger mortgage guidelines that could reduce funding available for investors and speculators in the housing market. Keep your eye on the Office of the Comptroller of the Currency for future developments here early in this year. Third, the astronomical surge in home prices in California and Florida could come to a screeching halt as homes become less and less affordable. If this does occur, it is possible that real estate investor focus could move away from these areas and land right in the Lone Star State. Texas houses and condos look like a screaming bargain compared to California, Florida, and New York. Fourth, federal changes in tax policy to reduce the tax benefits of real estate ownership could upset the entire U.S. real estate market with a stroke of the pen from the president. This event is unlikely to occur in the foreseeable future.

Texas REALTORS® have been working at breakneck speed for the past eight years, always wondering how long the ride can last. Plan to be working hard again in 2006—lots of people will want to buy a house … and land … and commercial property.

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