Texas adjusts to growing pains as outside buyers jockey for homes

In July, Inman gazes at the glitter and glam of the luxury real estate market. Snapshots of the country’s top luxury markets, advice from leading agents, features on what affluent homeowners want now and a breakdown of the top sales of 2023 (so far) are all in the cards leading up to Inman Luxury Connect, Aug. 7-8 at the Aria in Las Vegas. Make plans to join us now.

This is the ninth article in an 11-part series spotlighting housing markets in Virginia, Texas, Florida, California and New York and the U.S. market. Read the entire Summer Cooldown series here as stories are published throughout July.

Texans are often known for their bravado, a trait that’s been passed through generations of pioneers that took the Lone Star State from a western outpost to one of the most diverse and industrious states in the nation.

However, according to Austin-based Spinelli Residential Group founder Jeanette Spinelli, a rough-and-tumble real estate market and bearish news headlines knocked the bravado out of buyers and sellers throughout the first months of the year — and eroded annual home sales by 70 percent.

“At the first of the year, it was very stalled in all price bands,” Spinelli said. “Consumer confidence was incredibly low. All the news media was citing year-over-year numbers, and there was such a stark contrast between a year ago. It made, the chasm of the numbers look worse than they really were.”

“[Seeing that news] eroded a lot of consumer confidence,” she added. “Sellers pulled out of the market if they didn’t need to sell, and buyers pulled back because interest rates were going up. It just created this paralysis that fed upon itself. It made the confidence of buyers and sellers dissipate.”

TEXAS SURGED AMID COVID. NOW LUXURY MARKETS ARE STRETCHED

Inman spoke to several other agents in Dallas, Austin, San Antonio and Houston who shared similar sentiments as Spinelli, saying the beginning of the year was unusually slow as homebuyers struggled to calculate the true cost of elevated mortgage rates paired with rising home prices and property taxes.

“We started in a rough market,” San Antonio-based The Castillo Group founder Mariana Castillo said. “I think that it was a shock to wake up in January, and obviously, see interest rates being higher than they were the January before. It was a lot of let’s wait and see what’s going to happen because it was such a rollercoaster of interest rates going down and then going up. It made a lot of sellers and buyers completely nervous.”

However, the market began to make a turnaround right before the summer as consumers — primarily buyers — got acclimated to 6 to 7 percent mortgage rates.

“It was a very late start to the spring. It wasn’t until May that we started to see some movement, which is very late for us,” Spinelli said. Typically, we see movement about 60 days before the end of the first quarter. It’s usually cranking and we didn’t have that happening.  As it relates to mortgage rates, it has become the new normal. People’s memories are incredibly short.”

Redfin’s June data shows Texas home sales are down 12.1 percent year over year, with median prices sliding 2.6 percent annually to $361,900. However, Zillow’s Home Value Index shows the median home price declining 0.4 percent annually to $303,971 — 16 percent lower than Redfin’s estimate.

Both portals show median price growth in Dallas, San Antonio, Austin and Houston aligning with their respective statewide estimates, with Austin taking the cake with median home prices of $605,000 (Redfin) and $567,255 (Zillow). The most affordable market is San Antonio, with median price estimates of $280,000 and $265,322, respectively.

Although activity picked up in May, June and July, Texas agents said there’s still a simmering skittishness in the market as homesellers are slow to list or make substantial price reductions, and homebuyers closely track market metrics. But this time, they’re coming to their clients with a message that rings clearer than a cowbell at dinner time: It’s now or never.

Several agents said the state is experiencing a boom of homebuyers — many of whom are millennials — migrating from the coasts to seize career tech and entertainment opportunities with companies like Universal Studios, Tesla and Oracle. Spinelli said high salaries and relative affordability have set these buyers up to compete in a high-cost market, and natives can’t afford to wait for things to slow down.

“Buyers have had the idea of waiting for prices to drop and interest rates to drop, but it’s become obvious that’s not in their favor,” Spinelli said. “A really astute agent can do the mathematics and show the high cost of waiting. Buyers have had to calculate, can I out-save the appreciation? Can I out-save inflation? Can I outpace the cost of living? And the answer, almost assuredly, is no.”

Hanging in the balance

Like many other agents across the nation, Texas agents said their markets are still in the midst of a shift from a seller’s market to a buyer’s market, meaning both sides of the table must make certain concessions to seal the deal.

Dallas-based Hershenberg Group founder Michael Hershenberg said homebuyers in North Texas have effectively ended the brief reign of bidding wars, as they’re pushing back on overpriced listings.

“Millennials are controlling the market right now, and so are executives coming from California or New York that are planting roots here in Dallas-Ft. Worth. They’re coming into Dallas and being a little bit more picky on exactly what they’re wanting,” he said. “They’re not willing to overpay for something. Two years ago, you could have put up a mobile home and put a $200,000 price tag on it and sold it. I’m joking, but that’s how it was. It’s a little bit different now.”

Hershenberg said homesellers are expected to come to the table with pristine, turnkey listings — neutral color palettes, updated fixtures and finishes, and no major repairs needed for the interior or exterior of the home. He said location is incredibly important too, with buyers vying for listings in neighborhoods near one of the city’s two major airports, Dallas Love Field or Dallas-Ft. Worth International.

“They want to find something that is very turnkey,” he said. “We still see multiple offers at certain price points, and if they’re going to pay above the listing price or pay top dollar for a property, especially with interest rates, they want to make sure that that property has been well taken care of.”

On the other side, homebuyers are expected to make air-tight offers with little to no contingencies and guaranteed financing, either through a cash offer or a fully underwritten mortgage loan.

“At certain price points and with properties that have been on the market for more than 30 days, sellers are willing to accept a contingent offer,” Hershenberg said. “But before those 30 days, it’s really hard for a buyer to go in with a contingency even if they really needed that contingency to sell their home before buying a new one. Buyers and sellers want to close as quickly as possible, especially considering the larger interest rate they’re paying.”

In Austin and San Antonio, Spinelli and Castillo are seeing list-to-close timelines of up to 60 days — nearly double what Hershenberg is experiencing in North Texas.

However, both women said the return to a longer list-to-close timeline isn’t necessarily a bad thing, especially as inventory in both markets ticks up to 3.0 months at the current sales pace. Those 60 days, they said, gives buyers more leeway to find a home they feel is worth the rise in mortgage rates, property taxes and HOA fees.

“There are a couple of questions I like to ask buyers: Are you in the right geography? That can never change, right? Is the home in the right school district for your family? Can that change? No,” she said. “Is it a place that’s going to show healthy appreciation? When we give that data to the client, we’re not just looking back at last year or the year before because there were such anomalies. I’m gonna go back to a tenure trend, and it shows yes, it’s an appreciating area.”

“They might say, ‘Gosh, I wish rates were 3 percent again,’ and that’s probably not gonna happen ever again,” she said. “So if a home checks a buyer’s essential boxes — you can change the countertops later — we move forward.”

Spinelli said home prices across the city have come down around 8 percent year over year, with home prices in the city center being a bit more sticky at a 1 percent annual decline. Although small, those declines offer homebuyers a small reprieve in a market that currently thrives on cash offers.

“Cash is huge right now. The data appraisers have to use doesn’t reflect what is actually happening on the streets, so if a buyer can do cash, or they have a good chunk of cash, so we’re not so heavily dependent on that appraisal,” she said. “It’s about making a clean offer without long time periods, including long due diligence periods.”

Austin-based Redfin agent Andrew Vallejo echoed Spinelli, saying the small reduction in prices has given Austin homebuyers a leg up as they contend with the highest median home prices in the state.

“I am not seeing a lot of bidding wars anymore,” he said. “I do believe Austin is one of the few anomalies in the country right now, where our prices inflated so much that they are still feeling a bit of a reduction.”

“Buyers do have a lot more power. Some have been able to take opportunities to have the seller buy their interest rate down or pay for closing costs. Others simply don’t have to submit 10 offers before they win a bid on a home,” he added. “But overall, they still need to be competitive. It’s going to be all about the net to the seller.”

Meanwhile, Castillo said San Antonio is an affordability haven for Texas homebuyers as the median home price is approximately $85,000 lower than Dallas, $30,000 lower than Houston and a whopping $300,000 lower than Austin. With that in mind, she said the city is a hotspot for millennials who want to step into homeownership.

“I’m a millennial, and I talk about this with my friends and my clients who are millennials. It’s a difficult time for us because, throughout our adult life, we’ve never seen a 7 percent mortgage rate. That’s scary,” she said. “But it’s also about knowing right now we are in a place where you can negotiate. Last year, you had to bring $40,000 extra to the table to get into a home. That’s not the case anymore.”

Castillo said most buyers can win a bid with an offer five percent below the asking price. “We, on average, have 5 percent negotiation room, which we didn’t have last year,” she said. “In fact, we had to outbid the next buyer, which we were almost at 103 percent average list-to-sales price. So now we’re talking about a percent difference in sales price.”

In addition to a strong millennial base, Castillo said San Antonio’s market is buoyed by five Air Force and Army bases, which create a steady flow of buyer and seller demand as soldiers are moved in and out of the city.

“We’re blessed to be Military City, USA, that’s what we’re known for. On average, four years is what our military families are staying in San Antonio,” she said. “They still have equity from the last four years, so they still have that money to be able to pull out and sell it at a good price and still have the equity to move into their next location.”

Lastly, Redfin Houston agent Alicia Grifaldo said Houston is a tale of two markets — with sales dynamics wildly differing inside and outside the 610 loop that surrounds the city.

“It depends on the house, right? And a lot of it depends on location,” she said of buyer competitiveness and list-to-sale averages. “It’s truly a case-by-case basis. It’s hard to sum up the whole market.”

“I’ve listed properties at $200,000, and those had multiple offers and sold very quickly primarily to first-time buyers,” she added. “Then I have other listings that have been unfortunately on the market for over 25 days and barely getting some action even with some price drops.

Although the pricing dynamics in Houston are difficult to pin down, Grifaldo said there’s one thing that’s the same: clean offers with guaranteed financing always win the day.

“When it’s time to write up the offer, if it’s been sitting there for a while, maybe we have a little bit of leverage,” she said. “But if it just hit the market, we have to make a pretty straightforward offer — competitive pricing and not asking for anything. It’s still about trying to appease the seller, right? They’re getting a lot of showings and know they could go into multiple offers.”

Luxury buyers are out of luck

While lower-priced segments of the market are experiencing an upswing, the luxury market is still tight as homesellers stay on the sidelines.

“Although listings went way down 24 percent, this is like in the last 30 days, there’s still opportunities in price points that are under I’d say about $1.5 million,” Spinelli said. “Again, that’s three times our average. So technically, in the luxury market, inventory is low. It’s competitive to get a good house.”

“Two nights ago, I went on a listing appointment for a $9 million property. I did eight different pricing perspectives for that, and the reason is that sellers need that assurance to list,” she added.

Martha Turner Sotheby’s International Realty agent Hedley Karpas said the luxury market in Houston “ceased to exist” at the end of last year, as homebuyers pulled out of deals in the face of growing economic headwinds. However, demand suddenly rebounded in January as mortgage rate volatility started to subside.

“When January came around, it was like all of a sudden they had amnesia, and they forgot what they had said,” he said. “They were literally coming out of the woodwork. So we had a very, very robust beginning to the year. The interest rates seem to have evaporated now from buyers’ minds. I don’t hear buyers even bringing it up.”

While homebuyers have moved past the interest rate hurdle, sellers haven’t. Karpas homesellers are hesitant to let go of the 3 percent mortgage rates they secured in 2020 and 2021, so they’re only listing if they absolutely have to.

“It’s almost like a little flurry of new listings come on the market and the buyers jump at those listings,” he said.” We’re back into the same pattern. We have buyers, but I don’t have any houses to sell them.”

“Of course, there’s always going to be some life event that will force sellers to sell their properties,” he added. “But I don’t see the market correcting itself anytime in the near future. It’s just not going to be a market where we’re saturated with listings.”

With that in mind, Karpas said he’s being upfront with buyers about it possibly taking five to six months to find a suitable home.

“With the initial criteria they’re looking for, it could take five or six months to find maybe two or three houses,” he said “Eventually the buyer turns around and says, ‘You know what, I’m not going to be so picky, I’ll expand my area.’ They tend to get a little bit more realistic, and then when we do find a house, if it’s a good house and typically if it’s a new house, there’s going to be a bidding war on it.”

Like the lower tiers of the market, Karpas said a winning bid is at or above the asking price, puts little pressure on sellers to make updates, and provides proof that a buyer’s financing won’t fall through.

“To make the offer sweeter, I don’t ask for an option period or ask for a very limited option period. One of the other things that I’ve resorted to, is in one deal we said we wouldn’t ask for any single item to be repaired, that would cost less than $3,000,” he said. “We don’t ask for a home warranty program. We’ve offered to pay for the title policy, if it’s a house that you really, really, really love.”

“Those are all little things that do make a difference,” he added. “Also make sure that when you do present an offer, your buyers have a pre-qualification letter or proof of funds attached to it.”

Karpas said he doesn’t expect buyer demand to dampen any time soon, as Houston’s robust labor market, high quality of life, and vast array of amenities keep Houstonians at home and attract plenty of out-of-state buyers. At the same time, he said he doesn’t expect seller activity to rebound for another few months, as fall tends to be a time that sellers list.

“It’ll pick up towards the end of August middle to end of August when school starts. We’ll get back into a busy season again, but it’s all going to depend on what new listings come up on the market,” he said. “Prices in Houston have definitely held and increased about half a percent year over year.”

“You have to be proactive,” Karpas added. “I recently sent a mailer saying we had a buyer looking for a specific kind of high-rise property and the high-rise market for, the first time ever, is dismal. I mean, you just can’t find much. So we sent a mailer to the buildings that were appropriate for this particular buyer, and we said, ‘This is not a solicitation to list your property. If you are interested in selling, I have a buyer for your specific property. Call me.’ I had four people call.”

Everything is bigger in Texas — including the opportunities

Although this year has been fraught with challenges, Texas agents are confident as ever about their markets and their state’s long-term prospects as coastal buyers seek out relative affordability and no state income tax. They’re also excited about the health of perennial Texas industries — namely oil and gas — and the emergence of new opportunities in tech and entertainment.

“About 30 percent of Houston’s economy is tied to oil and gas, and with oil prices in the $70 to $80 range, energy companies have been doing well and hiring, expanding and relocating people to Houston,” Houston Properties team leader Paige Martin told Inman. “We’ve also seen strong job growth in our healthcare and services sectors, bringing 50,000 to 70,000 people per year to the Houston metropolitan statistical area.”

“Job growth is the No.1 predictor of real estate prices, so I think this tailwind will continue to bring momentum to the Houston real estate market,” she said.

In Dallas, Hershenberg said he’s excited about the influx of interest from tech and entertainment giants, such as Tesla and Universal Studios. Those new entrants in addition to the area’s strong education industry provide a “hedge” for Dallas buyers, he said.

“North Texas has this hedge of protection around it,” he said. “There are the new movie studios and there’s Universal Studios and PGA [golf] segment. Our state’s income taxes and incentives for new businesses make us a very healthy environment and a cost savings environment for many corporations moving forward.”

“We now have a segment they call the billion-dollar mile. It’s everything along the north Tollway going up in Frisco and a little town called McKinney,” he said. “It’s really growing and really healthy right now.”

Despite a year of volatile price fluctuations, Castillo and Grifaldo are confident in their markets’ futures as Texas’ relative affordability provides avenues for young professionals to secure a well-paying job and build long-term wealth through homeownership. Castillo also sees San Antonio, in particular, becoming a haven for retirees looking to make their nest eggs stretch while maintaining a great quality of life.

“I had a buyer that was comparing their home in California that’s 1,700 square feet to the home they’re purchasing here that’s over 4,000 square feet,” she said. “Their home in California is $2 million, but the home here is $650,000. And because they qualify for 100 percent disability, they won’t pay taxes here.”

“And so when you look at how much money they will be able to save throughout the years and get a better living experience, it’s hard to beat,” she said. “That’s the reason why people are flocking to Texas, especially to San Antonio.”

Meanwhile, Spinelli and Vallejo said Austin has fully taken on the role of being the ‘Silicon Valley of the South’ as more tech companies place their stakes in Texas’ capital city. Beyond what Austin provides for tech wonks, Spinelli said natives and transplants are captivated by the city’s nonconformist culture that welcomes everyone.

“The Austin lifestyle is so dynamic and vibrant. It’s an energetic city,” Spinelli said with palpable excitement.” Austin is very different than most of the cities in Texas. There’s an openness to being able to live your life as the person that you are, and not being such a conformist. There’s an open mic for that. And we’re all very comfortable with hearing differences of opinions.”

“Austin could almost literally be its own country. It is really a very different kind of atmosphere here. Maybe some people would disagree with me,” she said with a laugh. “I think it’s almost a utopia of having diverse opinions and people being able to coexist because there is this consideration and openness.”

Email Marian McPherson

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