Do you think the owners will stay put? Austin suggests otherwise

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Mortgage rates have nearly tripled and housing affordability has plummeted, but US home prices aren’t really expected to drop much — or so the mainstream narrative does. However few buyers there are, there are too few sellers to drive prices much lower, optimists say.

Austin, Texas seems to disagree.

One of the hottest housing markets of the pandemic-era boom, the Texas capital has suddenly seen a flood of inventory of existing homes. The number of listings has jumped to the highest since 2011, and in a metro area that has become accustomed to going through inventory in less than a month, it now takes more than three, according to data from Texas Real Estate Research. Center at Texas A&M University. .

Austin is a unique case, of course, but it shows that the “lock-in effect” may not be the ironclad defense against falling home prices that some investors and homeowners think it is. The thinking says homeowners aren’t supposed to voluntarily part with their sub-3% 30-year mortgages when they should turn around and replace them with new home loans carrying interest rates above 7% . That’s true for the typical young family that may have been on the verge of growing, but it’s not a hard and fast rule that applies nationwide.

In Austin, what seems to be happening is an effort to time the top of the market. Like stock traders, homeowners and investors in Austin who bought their properties before the boom seem to be rushing to cash in their tokens. “I suspect people are worried about home values ​​going down, so they try to sell even if they have low interest rates,” Jim Gaines, a research economist at Texas Real Estate Research, told me over the phone. Center. Some may never have lived in the houses; others may transfer cash proceeds to smaller homes or cheaper suburbs; while others might just move into renting waiting for a market bottom to buy back.

While still up year over year, Austin-Round Rock home prices are clearly down, falling 6.9% on a sequential basis in the third quarter from the second, according to the home of the Texas Real Estate Research Center. single-family home price index, which tracks repeat sales on the same homes. The declines are widespread across all price categories, though the most expensive homes are holding up slightly better than mid-priced and lower-priced homes, the data showed.

Owners may also be keen to take profits in other recently hot markets such as Miami, Phoenix and Boise, Idaho. All were juggernauts who benefited from the combination of 2021’s low interest rates and pandemic-fueled migration. And now many of their longtime residents sit on piles of untapped equity, a tempting resource to tap as inflation eats away at purchasing power.

Admittedly, it is not certain that this first wave of registrations will necessarily snowball in Austin or elsewhere. In fact, it’s conceivable that many of these sellers will start pulling their listings from the marketplace once they see they’re not getting the deals they were hoping for, and proponents of the “lockdown effect” could still be justified. Underwriting standards have tightened considerably since the financial crisis and there are far fewer resettable loans, so the US is unlikely to see an impending wave of forced sales. With few homeowners underwater, there is a strong incentive to keep making mortgage payments rather than risk foreclosure.

So, ultimately, the fate of house prices rests with the labor market. The median forecast from a Bloomberg survey of economists predicts that unemployment will hit 4.5% next year. But with the Federal Reserve rapidly tightening financial conditions to combat the worst inflation in 40 years, the range of estimates is wide – 3.3% to 6% – and the likelihood of a recession is rising. “If people start losing their jobs willy-nilly, then yes, those house prices are going to come down fast because there’s going to be an increase in distressed sales,” Gaines told me. In other words, low inventories can probably dampen most housing markets for a while. But if the labor market starts to crash, housing will likely crash with it. In Austin, the low-inventory bulwark is already starting to crumble.

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Jonathan Levin has worked as a Bloomberg reporter in Latin America and the United States, covering finance, markets, and mergers and acquisitions. Most recently, he served as the company’s Miami office manager. He holds the CFA charter.

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