In Texas, 2013 was the year we felt the economy turn a corner. Although the recession “officially ended” in June of 2010, most consumers and businesses point to last year as the year they felt and saw the economy turn. In the real estate industry, we saw stronger home value and real estate appreciation. Here in Texas all four metros and most Texas cities and towns had near record years for home resales. Regionally almost all of commercial real estate not only saw increased interest, but saw occupancies and values improve dramatically. Whether it was office, retail, or industrial almost all commercial saw occupancies in the 90% range.
The main thing about 2013 was we saw a significant change in consumers psychology. The fear of job losses decreased dramatically. We saw seven years of pent up demand for homes and commercial expansion come to fruition. Consumers and investors were no longer in fear of declining home and real estate prices. All this positive economic news coupled with low interest rates created ‘positive leverage’ in most consumers minds. The return of positive leverage brought back speculators as well as the consumer. Above all, consumers started buying consumer products.
In short, consumer confidence improved. A rating of 100 on the index is when consumers begin spending historically. Nationally it has improved dramatically, as you can we in the chart below. In January 2009, the consumer confidence index was at a historical low of 37.7. Nationally we have recovered over 50 points. While this is a move in the right direction, that is only 10 points a year, not exactly a rousing endorsement of confidence from the nation’s consumers. The good news is that you live in Texas where jobs are being created and consumer confidence is dramatically better than the rest of the nation as evidenced by the chart below.
Still, we are a long way away from full recovery. 2013 was a great year, but it was far from typical. It was that type of year that comes along every 10 to 15 years. Great demand and not enough inventory allowed good value appreciation in almost all economic channels. However, comparing 2014 to 2013 is not a fair comparison. Look at the last 5+ years on your comparison, which gives you a truer picture of overall values as well as what an exceptional year last year was. The demand, value appreciation, etc. needs to be tempered moving forward.
Here are the plain facts. Building starts for new homes provide one of the most sensitive indicators of housing demand. The number of single-family housing starts reveal the stark reality of the recent boom and bust. Single-family starts ran at an annualized rate of about one million starts for many years, rose to a rate of almost 1.8 million starts at its peak in 2005, and then collapsed at the bottom to a rate of slightly less than 400,000 starts. Now, the number of single-family starts has risen. The good news is that housing starts have increased significantly since the bottom. The bad news is that the normal rate of starts prior to the housing boom was around one million annually, and we certainly have not returned to that level of construction.
After plunging in June of this year, housing starts and housing permits recovered in July, with a 1,093,000 and a 1,052,000 projected annual pace, respectively. The good news is that this is a 15.7% gain in starts and permits. The bad news is that almost all of those gains from June to July in starts and permits are in multifamily rental housing. To some that is the beginning of the housing recovery. However the majority are not buying homes. Here in the Lone Star state we see demand strong for apartments (95+/-% occupancy in most Texas metros. That’s not the sign of a housing recovery. That’s the sign of a shift from an ownership mentality to a rental mentality for a myriad of reasons. Most national surveys show that the vast majority (70+%) of people of almost all age groups want to own. Home starts should be at a 1.5+ million pace annual. There is still room for improvement as well as ‘catch-up’ demand for the previous 7+ years.
The good is that job growth is gaining traction. Job growth averaged 272,000 jobs nationally for the last four months. This is a dramatic increase on monthly gains after the last 5+ years of anemic growth below 150,000 new jobs monthly. All the gains took place in the private sector. Government employment fell slightly over the year. A healthy economy in the US should create around 300,000 to 350,000 new jobs a month. It sounds like a lot, until you divide it by 51, to get the total number of jobs created in each state and district. The last unemployment report employers reported 142,000 new jobs, the smallest number so far this year; it was the first time since January 2014 that monthly job creation fell below the 200,000 level.
The positive growth psychology is undermined by less than acceptable numbers comparatively. It is hard to be bullish about the economy when it keeps sending conflicting messages. We were told at the first of the summer that the rise in housing starts was an encouraging sign, and the recovery in construction activity was getting back on track. National, regional and local homebuilder confidence seems to point to their confidence in better future times, and further gains to come. But, over the last few months we’ve seen a moderate slowing residential sales. Every time there is an uptick in housing starts, pending sales, and mortgage applications the media says the market is recovering, yet when it does not continue to increase monthly, the media and consumer start mentioning reasons such as weather, or the development of a bubble.
It’s never blamed on a tepid economy that home starts regionally are at about 45% of the previous highs. It’s never, ever blamed on the tepid economy and the part-time job market and lower wage growth that’s been the new norm. Wage growth won’t happen until employers feel comfortable and then the jobs will return, and the last couple of monthly jobs reports heralded in the media have been heavy on the part time and low income jobs, and light on full time and middle class. Nationally the higher paying wage jobs have not been created, which in turn with housing costs increasing 40% to 60% over the last ten years in just Texas has focused construction on apartment construction, not home building. So, again yes we are recovering but it is going to take a while to get to full recovery and an improved economy.
According to the latest Federal Reserve beige book, the last two months saw the U.S. economy grow at a modest to moderate pace. The good news is that it remains positive. All growth was described as “modest” in the 12 districts encompassing the nation. Its hard to get excited about ‘modest growth’. Although it is positive news, it is hard to lead cheerleading on ‘modest’ growth.
So where are we? Recovered or not?
First, one of the first things many are doing is comparing this year to last year. Last year, was an ‘outlier’ year. A year that comes along every 10-15 years. We had demand, not enough inventory, banks not lending, etc. A perfect storm for sellers!
Secondly, we have not seen a collapse of values. Demand is still there, are the realtors capturing all of it? No, builders have been able to build inventory. Demand is still greater than what is being delivered to the market.
So, what is happening? Last year there was little inventory in all price points. This year we have seen inventory increase dramatically in many areas, as sellers want to sell after waiting a number of years. Particularly in the $300k to $700k channels. Pricing is paramount if the seller wants activity. If the home is on the market over 30 days, it is not priced correctly.
In comparison, when brokers talk to their clients they need to compare for 5 to 10 years. They do need to look back more than one year as we have shown, to see what inventory has done over the last year in their neighborhoods. A fair comparison on values and looking at whether it is a bubble is to look at the last 5 to 10 years. If you have had double digit appreciation for 5 or 10 years, the historical possibility of a bubble is great. Austin and the Texas metros have never experienced that.
I would refer them to the March 29, 2013 edition of the Independence Voice. Five things have to be available for a housing bubble: tight supply, demand, regulation, and easy financial terms, and speculation. We are lacking in the last two.
I am optimistic about our continued recovery, particularly in our region. Here are the strengths as I see them.
Home starts, jobs, and corporate profits
After several years, the labor market added 230,000 net new jobs on average for the first 7 months of the year. On the negative side, household formation still remains slow, with the Census Bureau reporting that over the last 12 months that net household formations were just over 1/3 of normal. 458,000+/- household formations vs. the 1.2 million to 1.5 million per year of a healthy national economy.
The number of persons per household has increased by 2.6 percent over the last 10 years since 2005, from 2.69 to 2.76 people per household. This amounts to 3 million additional households that will begin to show up over the next few years. That is close to 60,000 households per state. They will require shelter, whether in apartments or homes. Eventually over 60% will end up in home ownership.
To say that young people should buy now is an understatement. The monthly mortgage payment-to-rent ratio for the U.S. is near the lowest it has been in more than 60+ years. There has never been a more affordable time to buy! So even with some increase in house prices and interest rates, the ratio will remain relatively low. One challenge for households seeking to transition from tenancy to ownership is amassing the funds for the down payment and closing costs. A stronger economy should provide a growing number of households the savings necessary for ownership in the future.
Most economic forecasts for the remainder of the year and 2015 have economic growth averaging 3.3 percent in 2015 and the unemployment rate continuing to decline. In this scenario, household formations should pick up and housing starts are projected to increase 28 percent over 2014’s pace to 1.3 million starts in 2015.
Profit margins are strong. Regional corporate profits have grown rapidly through cost-cutting, employment growth, some new products, and a touch of revenue growth. Most analysts see margins moving closer to normal levels, particularly as revenue increases. This means slower earnings growth but not a reduction in earnings, eventually helping job growth here locally and regionally.
Shift to full time workers
Nationally as well as locally, employment growth lagged behind the economic recovery. Texas metros have been blessed with lower than average unemployment as well as stronger than national or regional hiring. Most businesses have been cautious in hiring, showing a preference for temporary workers. In talking to some HR groups, the mix changed the last two years and will continue to focus more on more full time employees versus the last five years.
One of the recurring themes I read from economist projections is many things will become ‘closer to normal’. That’s not saying that problems will disappear. We can still discuss the negative issues surrounding banking, real estate, unemployment, demise of UT’s football team, etc. Most problems cannot and will not be solved in a single stroke. Improvement comes gradually, not overnight.
Bank lending is more optimistic. Banks nationally as well as regionally have been very cautious, rebuilding capital, and keeping credit standards stringent due to all the national issues and new lending guidelines. Although it hasn’t been immediate or dramatic, there are many indications that lending regionally has become more aggressive and credit availability is increasing. That said, we are a long way from ‘how it was’ a couple of years ago. Looking back to the last seven years, the change is much more noticeable with positive results showing most regional metro economies in a expansion mode. With all the issues in the lending industry still, most don’t want a return to the ‘way it was.’
Regional consumer confidence is a key strength
Texas is lucky in that whether it is our ‘attitude’ or just that we were not hit as hard as the rest of the nation, consumer confidence in our South and West region is higher than the national average. This healthy regional consumer confidence shows itself in regional and local retail spending. Restaurants and stores are having much better years than the previous seven years, but not near the record years of the previous decade.
Nationally, regionally, and locally business executives have been cautious. As we continue to look at 10-K annual reports (a comprehensive summary of a public company’s performance) as well as potential venture funding, it will continues to get closer to a perceived ‘normal’. There is plenty of cash on corporate balance sheets and 2015-16 will see increased investment and hiring.
The conclusion is that there is more to be optimistic about than pessimistic. Should we question the strength of the economy? Absolutely. But realize, nationally there is a long ways to go. Regionally, Texas has been blessed and seems to be able to continue along a positive path. The anemic national economy is curtailing the positive economic growth and strength of our state.
Remember this, sold values have not retreated. Absorption is still there. Economic growth is still there.
Has the market caught up to itself? Not in my opinion. All economic channels seem to be taking a short breather before continuing positive growth. If there is a need to sell or buy, do so now. As a seller or buyer do your homework and value it correctly (if on the market over 30 to 60 days it is not valued correctly). If buying, the same standards apply. Limited inventory, and a little less demand. Watch your neighborhoods and understand that whatever real estate channel you are in the market still has room for growth.