Texas Home Sales Set to Cool in 2021, After Enjoying 7-Year High

According to the Texas Real Estate Research Center, existing-home sales in Texas hit a seven-year high in 2020, but local housing experts anticipate those numbers will slow down in 2021.

The state's housing market stabilized in December 2020, ending the fourth quarter with slower growth than the previous three months, when pent-up demand spurred home sales. Existing homes sold through Texas Multiple Listing Services (MLSs) inched up 0.9 percent from November but ended the year up 7.7 percent compared with 2019 activity amid historically low mortgage rates.

In addition to low mortgage rates, strong population growth in Texas supported housing demand within the state during 2020. Texas added 374,000 residents, more than any other state, and ranked fifth in percentage growth behind smaller states such as Nevada and Idaho.

"Demographic trends, such as aging millennials and migration from out of state, will help drive Texas housing demand in 2021," said Dr. Luis Torres, research economist for the Texas Real Estate Research Center at Texas A&M University. He said sales are expected to continue to increase in the new year, albeit at a slower rate.

Nationally, existing-home sales rose 1.3 percent across the country relative to November. According to the National Association of Realtors (NAR), the annual growth rate was 5.6 percent. First-time buyers accounted for 31 percent of December sales, unchanged from the same time in 2019, but down from 32 percent in November 2020.

A significant challenge to the Texas home market in the new year is the state's depleted inventory levels. Months of inventory sank to 1.8 months in December as the number of new MLS listings added during 2020 declined more than 6 percent from the previous year, starkly contrasting Texas' greatest annual sales increase since 2013.

The mismatch between supply and demand has prompted a wave of new home construction. Single-family permits are predicted to rise around 15 percent in 2021, Torres said.

"Homebuilders are trying to satisfy demand in the lower price cohorts by building homes in the suburbs or outer city borders where land costs are lower," Torres said. "This trend was prevalent before the pandemic but has become even more widely adopted over the past year."

Nevertheless, the Center expects the price per square foot to accelerate about 8 percent in 2021.

"Some of the appreciation is due to exhausted inventory at the lower end of the price spectrum forcing buyers toward higher-priced homes," Torres said.

Another headwind to Texas' housing market is the ongoing uncertainty regarding the COVID-19 pandemic. While a second strain of the virus that seems to be more contagious was discovered in December, the mutation does not appear to severely worsen health outcomes. On the bright side, vaccines are rolling out with additional distribution planned, and a second federal stimulus bill approved in the last days of the year should provide some relief to businesses and households.

"Because this recession was caused by a health catastrophe, the recovery path could be different than that of previous recessions. Consumer and business safety expectations will play an important role in the economy's full reopening," said Torres.