Houston Mortgage Demand, Housing Activity Remain Strong

Will the Houston housing market escape the housing bubble? In a word, yes. Houston’s residential real estate market will avoid the collapse suffered by cities on both the East and West Coasts for several reasons.

For starters, Houston has not experienced the price declines that have occurred in other cities; this is largely because the region did not enjoy the tremendous price appreciation other housing markets experienced from 2003 to 2006.

While housing prices in many of the cities in California, Nevada, Arizona and the Florida housing market were experiencing annual home price appreciation ranging from 20 percent to 50 percent in some cases during the mid 2000s, Houston has consistently experienced annual home price appreciation from between 4 percent and 7 percent.

False demand
Other markets had such an increase in prices mainly because so many home loan borrowers jumped into the new home market as investors with no intention of living in the homes.

These speculators who contracted for these homes were inflating the prices and flipping them, in many cases before the houses had completed construction. They also created a false signal that there were more buyers than actually existed, and home builders increased their construction levels to meet the supposed increasing demand.

In some housing markets, as many as 25 percent of the new home sales were sold to investors. When builders recognized that so many investors were contracting for homes, they attempted to introduce ways to prevent this from occurring. However, it became too tempting for many of them to fully enforce their strategies preventing sales to investors. In addition, it can be difficult to determine when a home mortgage buyer is actually going to live in the house or is planning to flip the house to another buyer.

This false demand eventually led to too many homes being built. The investors began to default on their contracts to purchase which led to large numbers of home contracts that did not close, what the home builders call “bust outs.”

In essence, the home builders increased construction to meet what was actually a false demand, as a result, there is now an oversupply of homes that builders still hold today.

This process is further aggravated by the fact that true buyers in these markets will now often delay the purchase of a home because of difficulty in determining the real value of the home under consideration. This further depresses the market.

To date, Houston has not experienced any of this. Because the Texas housing market has experienced a steady annual increase in home values of roughly 5.5 percent since 1996, investors generally feel it is not worth the risk to buy and flip homes.

Houston will also miss the housing bubble felt by many big cities because it is a growth city. It added nearly 100,000 jobs in 2006 and is projected to add roughly 70,000 more in 2007, nearly double the projected U.S. growth rate of jobs. All of these people, plus Houston’s natural growth, will cause Texas mortgage demand for housing to remain steady.