Is the DFW Real Estate Market Headed for Trouble?
First and foremost, I am in no way saying that the DFW real estate market is headed for certain trouble. But anecdotally speaking, the odds of a market decline appear to have increased.
Key Takeaways
- The new tariffs could instigate an economic recession.
- Thus far, treasuries are taking a beating along with stocks.
- Higher mortgage rates could be in store.
- The double-whammy of higher mortgage rates and economic stagnation could negatively impact the DFW real estate market
The sky is not falling, but I think the events of the past week give us something to keep our eye on as the tariff wars progress.
I have said numerous times over the course of the last three years (and even recently) that the chances of a market decline in DFW are slim. My caveat is always that a black swan event could torpedo that assessment.
Over the last week, we have witnessed what could turn out to be such an event. As the Trump tariffs have taken effect, world markets have reeled. The S&P 500 Index has dropped more than 11%, and the 10-year Treasury yield has gained around 13 basis points.
What does this have to do with the DFW housing market?
Threat of a Recession
I reiterate that we - the United States - are currently not in a recession, and a near-term recession is still far from certain. However, with the tariff wars heating up, the likelihood of a recession has definitely risen. JP Morgan's Jamie Dimon has even gone so far as to say that a recession is a likely outcome of all the new tariffs.
Is he right? Are we headed for a national or even world recession?
It is possible. What we know is that the current world economic environment - with all the sudden tariff and trade wars going on - is unprecedented. The truth is that no one knows what is going to happen. It is very possible that all the global participants of the free market will continue to panic, and that the result of the panic will be recession. It's also possible that Trump could decide tomorrow to cut all the tariffs, and things go back to the way they were a week ago.
My opinion is that the longer these tariffs sit in place - and the more that get implemented - the greater the likelihood of a recession. And if we do see a recession, I think there is a likelihood that even the Dallas / Fort Worth housing market could see a decline in prices.
I still believe that the demand for housing in DFW will remain strong relative to the rest of the country, mainly due to the continued influx of people moving here. As a result, any decline we see in DFW will likely be less pronounced than in other parts of the country. But I do think there is now an added risk of a housing price drop in our area that wasn't there before.
Treasuries and Mortgage Rates
A recession alone could trigger a decline in the housing market, but compound that with higher mortgage rates, and the housing decline could be even stronger. Are mortgage rates headed even higher?
Recall that mortgage rates are tied closely with the 10-year treasury yield. As the 10-year yield rises, so do mortgage rates. Additionally, recall that bond yields and bond prices move in opposite directions to one another.
In the old days, when the stock market went down, investors generally flocked to bonds, and especially to Treasuries because they saw these instruments as safe havens while the stock market did its thing. As investors would pile into Treasuries, the prices of these instruments would rise, and consequently, the yields fell.
Today, we are witnessing not only a steep drop in stock prices, but we are also seeing a massive selloff in Treasuries. This is resulting in the 10-year note yield rising. Over the past week alone, the yield has risen 13 basis points (0.13%).
The reasons for this are likely numerous, but one major reason is that many investors are nervous about placing their funds in U.S. Treasuries because the isolationist actions of our government discourage other countries from investing in our nation's debt offerings. A decline in demand for Treasuries necessitates an increase in yield.
As yields move higher, mortgage rates will also move higher, and this could significantly dampen the normal spring/summer buying season as potential buyers are faced with increased homeownership costs.
Conclusion
What do we do?
I believe the key at this point is to keep an eye on the 10-year Treasury yield as well as the overall stock and bond markets. If the tariffs stay, these markets are likely to be negatively impacted, and the longer-term result would likely be an economic downturn that would ultimately affect the DFW housing market.
As of today, the housing market is still strong. I am seeing plenty of homes selling, and prices are not in decline at the moment. Buyers and sellers are both active. But the tariff situation could be the proverbial canary in the coal mine. To put it bluntly, the current direction of the various markets is not favorable to the housing market.
If you are not needing to buy or sell right now, you can afford to simply stay put and let all this tariff business work itself out. However, if you are thinking that you will need to sell and/or buy in the near future, you may want to consider doing so sooner rather than later. If the stock and bond markets don't improve, we could see a situation in which buying and selling homes becomes challenging as buyers lose buying power and sellers face a shrinking buyer pool.