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JULY 2000 Residential Sales PUBLICATION 1406
A Reprint from Tierra Grande, the Real Estate Center Journal
A rented house is an investment good,
but when the owner occupies it, the
house is both a consumer and invest-
ment good. The owner has a home, and
the house is an investment that can be
realized when the house is sold.
Two-thirds of U.S. households own
homes, and homeownership constitutes
about one-third of all household wealth.
Studies reveal that homebuyers consider
themselves both consumers and inves-
tors. A 1998 study reported 44 to 64
percent of homebuyers consider invest-
ment a major factor in their buying de-
cision. Less than 10 percent of buyers
said that investment was not an impor-
tant consideration.
These findings help explain why in-
creasing home prices can have a positive
effect on home sales activity. Rising
prices rekindle interest in purchasing
homes as investments because buyers
see an opportunity for profit. Rising
E
very real estate professional wants Higher disposable incomes (incomes house prices increase sellers’ profits,
to know what is going to happen minus taxes) offer households more pur- resulting in larger down payments for
to sales volume in his or her area. chasing power. More purchasing power prospective trade-up buyers and helping
While the Real Estate Center has no makes it possible for people to move to sellers offset transaction costs.
crystal ball, researchers have developed bigger, better houses or neighborhoods
an economic model that helps make sales or even purchase a second home. Model Limitations
volume forecasts. Before using an economic model for
Many factors — house prices, neigh- Mortgage Rates forecasting a number of caveats should
borhoods, house characteristics, inter- Higher mortgage rates have a negative be considered. First, no matter how so-
est rates, down payment amount, agent impact on Texas home sales. A 1 percent phisticated a model, it is still a simpli-
marketing skills and availability of increase in mortgage rates is expected to fied version of the complex real world.
mortgage loans, among others — influ- decrease home sales by 1.9 percent. Many real world factors and variables
ence homebuyers and sellers. These fac- From the standpoint of homebuyers, are not included in a model because data
tors determine when and where homes higher mortgage rates mean higher is unavailable.
are sold. By observing the factors at monthly payments and less affordability. Second, as in real life, models are based
various stages, it is possible to weigh Some buyers may decide not to buy or on past experience. The future may not
their importance and to predict, for may postpone buying until mortgage behave like the past. Thus, economic
example, how changes in mortgage rates rates fall. From the home builders’ stand- models embody a number of assumptions.
or homebuyer income affect home sales. point, higher interest rates increase con- Finally, a forecasting model requires
Researchers at the Real Estate Center struction costs and home prices and, forecasted variables. For the Real Estate
have constructed a model to estimate therefore, reduce demand for new houses. Center’s home sales model, inflation-
Texas single-family home sales (see Cen- adjusted Texas resident per capita in-
ter technical report 1368, What Factors Homes as Investments come, home prices and mortgage rates
Determine the Volume of Home Sales Texas homebuyers treat single-family must first be determined.
in Texas?) The model shows that mort- homes as investments, and there is a A forecasting model should be only
gage rates, per capita disposable income positive relationship between home sales one source of information. Nothing can
and home prices, all adjusted for infla- and home prices. A 1 percent increase in replace judgement. For these reasons,
tion, are the most important determi- home prices is expected to increase home one approach to using a model for fore-
nants of Texas home sales volume. sales by 0.9 percent. casting is to consider various “what if”
Debate continues over whether a scenarios. See the related article on the
Per Capita Personal Income house is a consumer or investment good. following page for ways to use the
Per capita personal income’s impor- Consumer goods are consumed; invest- Center’s model for forming expectations
tance as a determinant of home sales has ment goods are purchased and held to of Texas home sales.
been increasing in recent years. Cur- produce a stream of income over time.
rently, a 1 percent increase in per capita Gasoline is a consumer good, but a ve- Dr. Anari is a research economist and Dr. Dotzour
income of Texas residents is expected to hicle used as a taxi is an investment is chief economist with the Real Estate Center
increase home sales by 2.4 percent. good. at Texas A&M University.
S
tatistical housing mod- holds down prices and incomes.
els like the one described on According to the model, this
the previous page help iden- scenario would result in about
tify factors that affect sales vol- an 8 percent reduction in home
ume. The model indicates that sales (167,500).
Texas home sales are stimulated • Scenario 2. Suppose the
by rising personal income and economy slows without higher
home prices and depressed by ris- interest rates. Real interest
ing mortgage interest rates, all rates hold steady while real per-
adjusted for inflation. sonal income declines. Real
Because the model not only By M.A. Anari home prices rise, however, from
shows what factors are important, the momentum of the previous
and Jack C. Harris
but how much those factors have year. Projected sales from this
influenced sales in past years, it combination are 169,100,
also can project sales in future years. nearly 7 percent lower than in
However, lest the model appear to 1999. This indicates that sales
be a crystal ball, it should be noted could slow even with no in-
that the accuracy of projected crease in interest rates.
sales depends on how accurately the variables (interest rates, • Scenario 3. The Texas economy has been growing
personal income and home prices) are projected. slightly faster than the nation. However, that rate has
The best way to use a model like this is to construct a series been slowing for the past two years. Assume the trend
of “what if” projections based on possible future conditions. continues and leads to a significant decline in real
For example, what if interest rates continue to rise during personal income. Combined with slight increases in real
the year? The model indicates probable consequences such interest rates and home prices, this scenario produces the
an occurrence would have on home sales, as is illustrated by least optimistic forecast for home sales. The resulting
the four “what if” scenarios and resulting projections shown 160,000 sales would represent almost a 12 percent drop
here. For perspective, note that home sales through reporting from 1999.
Texas MLSs totaled 181,300 in 1999. • Scenario 4. With continuing recovery in oil markets and
All variables used in the model are “real” numbers, mean- growing demand for Texas products in the rebounding
ing they have been adjusted for inflation. In the case of Pacific Rim economies, the state’s slowing economy could
interest rates, the real rate is the return achieved by the lender reverse. Suppose this turnaround raises real personal in-
after the effects of inflation are subtracted. A nominal interest come and home prices. Interest rates fall as the national
rate of 8 percent would yield a real return of 6 percent if economy slows. This favorable combination of trends
inflation was running 2 percent per year. According to the yields another record-breaking year, with sales exceeding
model, a rise in nominal rates purely because of a rise in 198,000, a 9 percent rise from 1999.
inflation would have no effect on sales volume. Therefore, With the Texas housing market running at such an unprec-
in the following discussion, a rise in the interest rate is edented level in recent years, it may be too much to expect
assumed to be caused by changes in the supply of available it not to slow somewhat. As these projections show, any
funds relative to loan demand. slowing in economic growth will lead to lower sales volumes.
• Scenario 1. Suppose the demand for mortgage loans con- However, should the economy find a way to pick up speed,
tinues to expand but growth of the money supply slows and interest rates reverse their recent climb, sales could go
as a result of the Federal Reserve trying to slow economic even higher than recent record levels.
growth. The real mortgage interest rate rises to 7 percent
Dr. Anari and Dr. Harris are research economists with the Real Estate
(as defined in the model, the real rate had a value of 5.6
Center at Texas A&M University.
percent in 1998). A more slowly growing economy also
LOWRY MAYS COLLEGE & GRADUATE SCHOOL OF BUSINESS
Texas A&M University http://recenter.tamu.edu
2115 TAMU 979-845-2031
College Station, TX 77843-2115 800-244-2144 orders only
Director, Dr. R. Malcolm Richards; Associate Director, Gary Maler; Chief Economist, Dr. Mark G. Dotzour; Senior Editor, David S. Jones; Associate Editor,
Nancy McQuistion; Associate Editor, Wendell E. Fuqua; Assistant Editor, Kammy Baumann; Editorial Assistant, Brandi Ballard; Art Director, Robert P. Beals
II; Circulation Manager, Mark W. Baumann; Typography, Real Estate Center; Lithography, Wetmore & Company, Houston.
Advisory Committee
Gloria Van Zandt, Arlington, chairman; Joseph A. Adame, Corpus Christi, vice chairman; Celia Goode-Haddock, College Station; Carlos Madrid, Jr., San
Antonio; Catherine Miller, Fort Worth; Angela S. Myres, Kingwood; Nick Nicholas, Dallas; Jerry L. Schaffner, Lubbock; Douglas A. Schwartz, El Paso;
and Jay C. Brummett, Austin, ex-officio representing the Texas Real Estate Commission.
Tierra Grande (ISSN 1070-0234), formerly Real Estate Center Journal, is published quarterly by the Real Estate Center at Texas A&M University, College Station,
Texas 77843-2115. Subscriptions are free to Texas real estate licensees. Other subscribers, $30 per year, including 12 issues of Trends.
Views expressed are those of the authors and do not imply endorsement by the Real Estate Center, the Lowry Mays College & Graduate School of Business
or Texas A&M University.
