The Dallas-Fort Worth real estate market is looking at a bear of a problem. After the worst Christmas-Eve trading session in history for U.S. stock markets, time is running out for the wise guys on Wall Street to save indices from entering bear market territory. Looking at home prices and sales volumes in the DFW area, it would seem things are still running along fairly normally; however, it could be a mistake to assume the recent softness in home sales is just a blip in an otherwise stabilizing market. We could easily see a rally into the end of the year and early into 2019, but that doesn’t mean the issues with the economy are solved.

Let’s start with publicly-traded home builders, including the largest U.S. homebuilder by volume based right here in the Dallas-Fort Worth area. As of Christmase-Eve trading, here’s how their shares were faring for the year (year-to-date).

D.R Horton – Down 35%

Lennar – Down 40%

Pulte Group – Down 26%

Toll Brothers – Down 35%

Dow Jones Home Construction Index – Down 35%

Homebuilder stocks have stabilized during the last few months as the rest of the market played catch-up to their severe cold. This is not surprising because as the market tanked during the last two months, interest rates did exactly what I expected them to do…they fell! I have been explaining for much of the year that I wasn’t too worried about a significant rise in interest rates. The reason is simple. There is simply too much debt in the system for any meaningful interest rate hikes to stick. Regardless of how many times the Federal Reserve hikes the Fed’s Funds rate, they can’t control ultimate end-user demand and the yields on the longer end of the curve that reflect that.

Yields on the 10-year Treasury plummeted roughly 50 basis points from their recent high, and mortgage rates have responded in kind falling to the lowest levels in months. They had to because the economy was choking on higher rates and the payments that come with them. That begs the question. Is everything fixed, or was this just a warning shot over the bough? Time will tell, but history suggests there is more volatility to come in 2019.

I have been looking at the pending sales data for an all-clear sign or cracks in the Dallas-Fort Worth housing market. I was fully expecting we would see some relief in the housing market with the drop in interest rates. That relief has materialized, and it looks like home prices are going to be higher heading into the end of the year as buyers take the opportunity to use the drop in rates to buy up some new home inventory that builders are pretty eager to get off their books. Those builders could be even more motivated at this time next year. Today’s numbers from S&P/Case-Shiller show that the home price index for Dallas has flatlined for 4 consecutive months. This comes after 54 consecutive monthly increases. In the latest numbers Dallas posted one of the lower readings in the 20-city metro indexes in terms of year-over-year price gains, up 3.9 percent in October. This compares to a 5.5 percent annual gain for the S&P Corelogic Case-Shiller National Home Price Index.

While the November closed sales numbers were pretty poor in the Dallas-Fort Worth area, pending home sales improved a bit in November…except for luxury homes priced at $500,000 or above where they tanked 9 percent, worse than the market average. It will be interesting to see the final pending sales numbers for expensive homes in December, one of the worst months for the markets in recent memory.

There will surely be some luxury estates for a million dollars or more trading hands as wealthy individuals trade their Fed-induced paper gains which filtered into real estate markets. What I am more interested in is the heart of the economy and the bulk of real estate demand. Luxury homes priced at $500,000 or higher constituted less than 10 percent of sales in November. Most of the transaction volume for Dallas-Fort Worth home sales still occurs at price points well below $500,000. Reading Dallas’ largest newspaper, you might be confused into thinking that Dallas is the new Silicon Valley, but that is certainly not the case, as evidenced from household incomes in the Dallas area.

I am hopeful for the coming year. Things will certainly be interesting with the Fed normalizing rates and reducing their balance sheet.  We might actually see something resembling true price discovery after the truth has been dragged, kicked and buried in a dark alley for the better part of a decade.

Updated: Now we know why the president called the Mnuchin to have him check on bank liquidity going into the Christmas holiday. They couldn’t have telegraphed a market intervention any better. Nothing like a 1000-point rip on the Dow from the Plunge Protection Team to inspire confidence in the “system”.

“They have record kinds of numbers. So I think it’s a tremendous opportunity to buy. Really a great opportunity to buy.” Donald J. Trump – December 25 2018

Are you not entertained?