DFW home prices have been on a tear during the last 5 years. That begs the question of whether the recent price gains are sustainable. The answer to that inquiry generally boils down to who is selling what. In our hyper-financialized housing market it is not surprising when real estate practitioners or lenders suggest that we are not in a housing bubble. Whether you call it a housing bubble or not, there is no denying that the past decade has seen some dramatic shifts in the real estate market. Dallas/Fort Worth is certainly part of this equation, and elevated home prices are putting an increasingly large dent in home buyer’s budgets.

DFW real estate prices are not the only example where this is happening. Diminished affordability of housing is a global problem, caused in large part by a massive liquidity stimulus from global central banks, including the Federal Reserve. Now that home prices have been reflated beyond previous bubble-level peaks, it remains to be seen how various housing markets will respond if the punch bowl is removed. The Fed has publicly stated that they wish to “normalize” their balance sheet, but can they? Now that the cat is out of the bag, is the dope dealer of last resort willing to put the patient (U.S. economy) into a recession? Those are some important questions that have yet to be answered. If October is any indication, the Fed is apparently getting cold feet when it comes to actually taking away the punch bowl.

With stock prices and home prices at nose-bleed levels, will the Fed have the fortitude to halt the reinvestment of the securities it holds and actually reduce the balance sheet anywhere close to pre-crisis levels? I sincerely doubt it, because I don’t think the fine people on the FOMC have a clue as to how they are going to exit this latest bubble gracefully, and that’s assuming they really care what happens to the broader economy (which I doubt). Like it or not, U.S. home prices and stock prices are hopelessly dependent on the Fed.

Attending a recent home buying seminar here in the DFW area reminded me that many loan officers and real estate practitioners are gloriously ignorant of this simple fact. That is a cause for concern, because home prices generally don’t run along a flat line. While some supposed “experts” (see dismal science of economics) will suggest that incomes will catch up to inflated home prices, the reality suggests otherwise.  Real estate prices are cyclical, and it’s pretty obvious that Dallas Texas has been the recipient of some pretty impressive home price inflation during the last five years. A recent analysis by Point2Homes shows how unaffordable Dallas homes have become.

Dallas TX ranks at number 17 on the list of the most unaffordable housing markets in North America, ahead of Denver and just better than the Bronx NY. Dallas’ “median multiple” ratio of 6.6 reflects how many years it would take a person with the median income to pay off the local median home price assuming you applied ALL of your paycheck towards paying the mortgage. Anything with a median multiple of 5.1 or higher is considered in the “severely unaffordable” category. Not surprisingly, there are a lot of North American housing markets like Vancouver, Manhattan, San Francisco and Toronto that are extremely unaffordable using this metric.

Does this mean that DFW home prices are going to fall off a cliff? Absolutely not. It does, however, mean that there are likely some consequences ahead for DFW’s rampant home price appreciation. Looking at inventory levels and the absolute volume of homes for sale on the market, I would not be surprised to see noticeable top-down compression in Dallas area home prices, similar to what I witnessed in Houston when the oil market fizzled.

Markets like Denton Texas and more affordable DFW surburbs should fare better than higher priced markets. Using the $68,189 median family income in Denton and the median closed sale price of a Denton TX home in September of $239,500 you would get an affordability score of 3.51. That is much better than the score noted for Dallas or Fort Worth.

This will likely be a new emerging trend in DFW real estate. Dallas fell from the top spot, dropping to number 5 on the list of best U.S. real estate markets according to a 2018 report from the Urban Land Institute and PWC. There is no denying that we are definitely “navigating at altitude” when it comes to Dallas area home prices. As I have detailed in the attached charts, this is a direct result of the Fed’s massive interventions in the markets and their yet-to-be-normalized $4.46 trillion balance sheet.