2015 was an impressive year for San Antonio’s housing market. According to the Real Estate Center located on the Texas A&M campus, 2015 residential home sales for San Antonio had increased roughly 10.8% from 2014’s 26,054 closed transactions. To illustrate this wasn’t a local occurrence between two years, 2015 sales relative to the past decade’s low point of 2010 had increased not by 10.8% but by an incredible 54%.
Recovering from the housing collapse in 2008, the US government needed to stimulate spending and return confidence to the US consumer. For obvious reasons, investing in real estate was not on top of anyone’s list. People were terrified of qualifying for more home than they could actually afford. The future did not look good during the recession and money was stagnating. The consumer was not buying anything and rather saving everything. The fascinating thing about economics is in many cases, economic forecasting can become a self-fulfilling prophecy. If one day the economy is in a very healthy state and the news warns that tough financial times lurk in the near future and people should make sure they have plenty in savings, the people will do just that; Consumers will cease consuming and begin hoarding all their money in low return savings accounts and certificates of deposit. The economy will begin to stumble because no one is spending, and eventually, the “predictions” will prove true as people stop buying new products, which cut into company profits, which then cut into their wage pay, and eventually lead to massive cut-backs.
Often times when government fiscal regulation intervenes with markets by setting unnatural price ceilings or floors, market equilibrium shifts, which soon creates a surplus or deficit of goods. In the most recent case however, the government realized the only way to lessen the effects of the Great Recession was to ensure not all of the circulating money in the US markets evaporated. In part, the way they achieved this was by bailing out big banks. In a capitalistic society, loans and mortgages allow fluidity and growth among its participants by permitting someone to make a large purchase without having all of the money up front. Imagine a world where you had to pay for your child’s college tuition the day before their first day of freshman year started, or a world where you had to pay that $39,999.99 sticker price before you ever drove that slightly used car off the lot. If that was the society in which we lived, growth as a nation would come to a crawl, because everyone would be collecting their money under their mattress for that one massive purchase and small businesses that make a living off arguably unnecessary goods, wouldn’t exist.
Thankfully for us all, that is not how our economy behaves. With loans and mortgages offered by banks, people are allowed to own these extremely expensive things without being a millionaire. So in order to prevent the complete collapse of the US economy as we knew it, government had to give the banks money to in effect, allow them to give us money. Currently the average interest rate for 30 year fixed mortgages is extremely low relative to the average 8.2%. Today the current average is 3.75% which is two standard deviations from the historical average. The reason for this is because we need people to be able to afford to still buy homes. Home buying is not only critical for the real estate industry, but also for the economy as a whole as historically several other large purchases are made during the time of a new home purchase such as washers and dryers and refrigerators. This injection of cash into the economy feeds the families of the people that work for home builders and appliance manufacturers and all the middle men in between that help get that product from the production floor to the show room.
A fascinating realization is that emotion plays just as big a part in economics as math and statistics does. Simply put, people are not always going to make the best money-wise conclusions because we all have emotion that affects our financial decisions. An interesting experiment to reference is a case where there are two people… both strangers, and both prevented from communicating. These strangers are asked to make two decisions; What amount, out of $100, will you give the other stranger, and what is the minimum amount you will accept? You did not have to give your partner anything, or you could give your partner $5 or all of it. The condition was this; if the amount you received from the other person came in lower than your minimum amount defined, you would not receive any of the money. Now, the question I pose to you, is what was the most efficient amount to wager? The way I worded this might have given the answer away, but $1 was the correct, most efficient minimum amount to accept. No matter what, $1 is greater than $0. Nearly every time this experiment is run with a test group, pride and social expectation and courtesy comes into play. More often than not, participants would give $50 or $40 to the stranger just because they felt it was right and wanted to be treated the same. The reason I bring this up is because people will not always act on what is best for them. Often times emotion trumps logic and we are all guilty of this. I’m not here to explain what the logical decision is because frankly, this article is not posing a question. The point I’m trying to make is strictly informative; there is a portion of that mortgage decrease that is there because government regulation understands we are all humans, and we need some more comforting, we need assurance because we are scared of the future. Because no government or entity can predict the future, despite any stock broker’s best efforts, the only way to convince us to invest in real estate again is to make it extremely affordable.
I strongly believe that one major reason why San Antonio’s residential home sales have increased by nearly 11% is due to the affordability of borrowing money.
How does any of this relate to you? Currently you will lock in a 30 year fixed mortgage at one of the lowest rates the US economy has ever seen. If you are a savvy money-minded individual, you will not go out and make that impulse buy, and you will not go out and call your realtor. If you are a savvy money-minded individual, you will be educated to the current market state, and understand the true value of your investments. We will take this information and use it the next time we make a real estate related decision.
Next week I’ll discuss other factors that impact this recent growth in San Antonio home sales.
Sr. Data Analyst
The Schrader Group