A recent report from realtor.com projects that the Lone Star State is poised to become the most populous state in the U.S. by 2045, taking those top honors from California.
With more and more people moving here, a big question is: Where will everybody live? Housing affordability is an issue, with 90% of respondents in a recent University of Houston/Texas Southern University poll saying housing costs are either a big problem or somewhat of a problem.
So how is the market responding? The recently released 2025 Texas Real Estate Forecast from the Texas Real Estate Research Center at Texas A&M University offers some insight.
Daniel Oney, research director at the center, spoke with the Standard about what trends we can expect to see this coming year in Texas real estate.
This transcript has been edited lightly for clarity:
Texas Standard: Let’s talk about residential real estate, since many Texans say affordability is a major issue. What issues are contributing to those housing costs, and where can we expect to see these costs added this year?
Daniel Oney: You know, that’s a great question. Everybody’s concerned about affordability. So the situation with home prices in Texas is that they’ve actually been moving sideways for a few years.
Starting in about mid-2020, prices really exploded for about 18 months. So we know what happened then. And since then we’ve maintained high prices.
So if you want to think about single-family homes, the median price went up over 40%. That’s much higher than the increase that we saw in single-family rents or in apartment rents.
What do you think’s going to happen in 2025?
We think that after 2024 being basically a sideways year – sales and home prices stayed about the same – we expect a little bit of price increase in 2025.
That’s really interesting because I was reading a recent report that said in three of the four biggest metros, new construction is up like 20% over the previous year.
And in fact, talking with some others, I hear that there’s already a sense of oversupply in a lot of Texas markets. If that’s the case, why aren’t prices going down to meet demand?
Well, you have to take both of them into account, right. And so I think those projections about new construction are true; we saw actually an increase in permitting last year. So that should lead to more starts this year. So that’s a good thing that will help take some of the pressure off prices.
But still there’s a huge amount of demand, you know, and you think about how many people that have been priced out of the home market. Those people would love to get into it.
And the other thing, things like construction costs, we haven’t seen a lot of relief on that front. So those new homes actually cost about 45% more than they would have if they were built a few years ago. You know, the the same amount of wood, the same amount of copper wiring, shingles, windows, but it cost 43% more.
So it’s costing more to build these homes. And so you’re not likely to see the prices fall anytime soon. And yet with so many people saying “I can’t afford it” – and in fact, mortgages getting harder to find – even if you do find a home that seems priced in your budget, it’s harder to get affordable insurance, right?
I mean, how do you close that gap? Because it sounds to me that that could be a recipe for a housing bubble in the not-too-distant future.
Well, it’s a challenge, right? The consumers, you know, just like businesses, when we saw interest rates go up, it’s a real shock. People had a plan. Maybe they were saving money for a down payment for a home. And then, you know, interest rates go up and it’s like the goalpost has been moved 50 yards on them.
But then they can recover from that. So if you see wage growth then we could see affordability get better from that standpoint. And our forecasts and other people’s forecasts are looking for incomes to be pretty strong this year in Texas.
As far as a housing bubble, you know, I think there’s still so much demand in this state that we don’t expect to see prices fall, you know, see a bubble pop.
Of course, a lot depends on continued employment, continued high growth in Texas, it sounds like. And a lot of this conversation obviously is focused on urban and suburban real estate. But let’s not forget about Texas’ rural areas.
What trends seem to be emerging when it comes to, say, rural land? And how does that compare with what’s happening in the cities?
Yeah, there’s a lot of wide open spaces in Texas. So we do pay attention to those markets. Now, the rural land market has been in a little bit of a doldrums recent years.
Prices have been pretty high if you look at the average price per acre. But our rural land team, they say that’s really been driven by a few trophy ranches or big properties that have sold. So it’s been a thin market; not a lot of transactions.
But going forward this year, they do expect some relief on interest rates, which will drive more demand, maybe a little bit of softness in the price expectations. So they see sales going up.
The one thing people need to keep in mind is that rural land sales in Texas really aren’t driven by demographics. They’re not really driven by agriculture. They’re driven by the desire for people that have wealth to invest in Texas land.
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Interesting, interesting. What about commercial side? How’s that looking?
So commercial is pretty broad, right? You can talk about offices, industrial, retail, multi-family. We did touch on all of those in our forecast.
So maybe we could start with office. That’s been the notorious asset class in recent years. Work from home did whack, you know, office buildings. But what we’re seeing, you know, you’ve heard many people talk about a flight to quality. You’re really seeing a segmentation of those Class A buildings.
We have a lot of really opulent, old, Class A buildings that were built back in the 80s. You know, the towers that define downtown Dallas and downtown Houston –
Those are getting reclaimed, it seems like.
Some of them, right. So some conversions. And that’s what I think – some of those buildings, the owners are going to make decisions about converting them to other uses or upgrading them to make them nicer. It’s really the amenities, things like green standards, other amenities in the neighborhood that drive business interest in office properties.
And so you’re going to see some torn down. You’re going to see some converted. I just read about a 65-story building in Chicago that they’re talking about demolishing. You know, I’ve never seen a building that tall taken down, but that’s something to think about when you see how this office market might rebalance itself over the next few years.
I want to ask you, five years out, maybe even further – big crystal ball here – how do you think the Texas real estate market’s going to look? Are we heading in the right direction, or do you see any concerns on the horizon?
Well, we talked about affordability. That’s going to be a challenge. You know, the state has to address that. We need more supply. We need more diverse housing. We need more density in some places. [It would] be nice to get some of that housing growth in the smaller markets, you know, where it might be cheaper.
But looking forward the fundamentals – we call them the drivers of real estate markets – we’re optimistic about those. It’s population growth and economic growth. Texas is going to continue out-competing the rest of the country at least. So that’s where I’d start if you were doing a five-year forecast.
