Is Texas overvalued?

Last week, the media picked up an article by one of the major real estate media outlets on the ‘overvalued’ Texas metros real estate.

The real estate and financial collapse of the last decade — a once-in-a-century financial crisis and recession — is not something most folks are excited to see repeated. Many parameters since the crash have been put in place to discourage another bubble and crash. Mortgage lending is tremendously harsher than it was 10 years ago, potentially excluding 3 to 7% of the total market from qualifying for home mortgages.

The housing market nationally is at about 40 to 50% of production / sales of where it was pre-recession. The last couple of years have been healthier, with Texas real estate in 2012-13 really showing strength.

Yet, after the real estate bubble, when any ‘hard asset’ market shows strength, the naysayers seem to take delight in looking for the next bubble collapse, whether it is in gold, stocks, Bitcoin, real estate, etc. I am not well versed in many of these, but know well the history, demand, and forecast of the Texas economy, having watched and participated in it over the last fifty years.

After a number of years of declining or stagnating housing prices, the market turned around big time in 2012-13, making some analysts and naysayers worry that we’re seeing the beginnings of Housing Bubble 2.0. The concern for housing bubbles is real, wherever you live.

However, there is a long way to go before the regional market begins to show those signs. Here in Texas we are not seeing this based on economics 101 – supply and demand. Are we overvalued? No. I am sure that if you delve deep enough into all the regional properties available, there are some that are overvalued. But as an overall market this is not true.

For those who are not familiar with the Texas’s history during the recession, it came out fairly unscathed with real estate values and employment leading the nation. During the bubble years when the sand states (California, Nevada, Arizona, and Florida) were leading the nation in appreciation (40+% annual), Texas was near dead last in home price appreciation, with less than 3% annual appreciation for a number of years. Texas was 50th in appreciation for a couple of years. We may have climbed up to 47th or so, but the runaway real estate speculation of the bubble states was just not available here to those looking for a ‘quick buck’.

Methodology

So to the point I am addressing, one of the major real estate media sources has named a number of our Texas region metros as ‘bubble markets’ to watch. Their basis is on tracking home prices across the country to see which markets are over and undervalued. In a forthcoming “Bubble Watch” report, they find that while most of the U.S. real estate market remains significantly undervalued, there are certain markets that feel are straying into bubble territory.

Realize that they are a media source, not a real estate broker. They are a very knowledgeable source but they make their money on advertising rather than real estate investment. We have a great deal of respect for the chief economist and his findings, but to call Austin and the other regional markets overvalued? Compared to what? You cannot compare to history, Texas and Austin appreciation has been one of the lowest in the country over the last 10 years. Check with the national sources such as OFHEO, FHFA, or Corelogic index.

Their methodology looks at whether home prices are overvalued or undervalued relative to their fundamental value by comparing prices today with historical prices, incomes, and rents. The more prices are overvalued relative to fundamentals, the closer they feel we are to a housing bubble – and the bigger the risk of a future price crash. By their own admission, ‘Recent price changes, by themselves, cannot tell us whether this is a housing bubble; neither can a simple comparison of nominal price levels today to where they were in the past.“

They then combine these various measures of value rather than relying on a single factor, because no one measure is perfect. In doing that markets in California, Orange county and Los Angeles are more than 10% overvalued. But where I argue is that they also showed the Austin, Texas market at 10% overvalued, while 7 other markets range from 4% to 7% overvalued. Those include:

• San Antonio, TX;
• Honolulu, HI;
• San Francisco, CA;
• Houston, TX;
• Riverside-San Bernandino, CA
• Oakland, CA

Unsurprisingly, these markets are where job creation has lead the nation, in Texas and California, which have also seen double digit home appreciation over the past year, with Orange County real estate appreciating a strong 23.4% since October of 2012.

So are we in danger of another housing bubble like we experienced last decade? Not quite yet, at least nationally. We cannot comment on those markets outside of Texas. According to their data, the national market remains roughly 4% undervalued overall. And in some markets, like Cleveland, Ohio and Palm Bay-Melborne-Titusville, Florida, home prices are still 20% below their fundamental value yet they do not have the employment growth or demand of the Texas region. Furthermore, even the most frothy markets are less overvalued than the national market was in 2004, when home prices were 24% overvalued nationally.

Starting with residential home values, Austin, San Antonio, D/FW and Houston metros are still challenged in inventory with all having less than 6 months inventory. Analysts at Texas A&M Real Estate Center will tell you that 6 months worth of inventory is equilibrium. Below that it becomes a seller’s market (a market where lack of inventory makes values improve). Above that mark of 6 months, supply dictates an easing of values, making it more of a buyer’s market. So based on demand and supply this market does not seem to be overvalued presently and with current absorption and employment projections, it will be 2 to 3 years at least before this could become an issue.

Looking at residential rental, the market demand currently has been outstripping demand for the last 2 to 3 years, even with near record supply of apartments being built in all Texas metros. Supply at some point should outstrip demand, right? It may happen soon in Austin, San Antonio or D/FW based on current construction. But demand has outstripped supply as shown by the lack of concessions or lower occupancy. Rental values over the last 10 years have appreciated over 50% with home values around 35%. Demand has kept values strong.

One of the things to keep in mind about current demand vs. prerecession is that the non-30 straight rate, 5% to 10% down programs that are prevalent now, were in the minority pre-recession when sales, values, appreciation, and speculation were stronger. The ability to have a bubble in real estate is more restrictive now.

Overvalue is overstated presently in the local regional markets. In other words, the real estate and financial world has changed. Younger families are unable to qualify. Young people have not gotten the economic traction since the recession. Even the ones who can aren’t getting mortgages because credit is much tighter than it was in the pre-bubble years, and recent price increases have been fueled by over-enthusiastic investors rather than true economy-wide demand for housing. Every real estate analyst is forced to used assumptions when forecasting the future prices of homes, and given the fact that home price appreciation in Texas has been healthy for a couple of years, may be going too far in arguing that certain Texas metro markets are overvalued bringing thoughts of another bubble.
Let’s look at appreciation from another source: Corelogic, an analytics company with lots of data. When you look at the following chart you can see that a number of states have had stronger appreciation than the Texas region.

voice graph 1 10-10

Another chart shows annual metro appreciation and supports the same conclusion of good appreciation, but not overvalued.

voice graph 10-10

Texas metros are not overvalued

In all Texas metros demand is outstripping supply and the entitlement and lending process have a way of governing development and building. Will Texas and it metros overdevelop and build in the future? Absolutely, the advantage of a free market is the ability to market real estate if you can get the financing. the market dictates whether the market is overbuilt or not. The market has a way of self correcting. All of our metros seem to be a few years away from slowing. Austin, which led the list of overvalued markets in Texas, has the longest entitlement process of approval, meaning supply will take a while to catch up to demand.

It’s still cheaper to buy than rent. If you live in a metropolitan area, it may make more financial sense to buy a home than rent a house, condo, or apartment. According to a to this same real estate media source study, buying a home is 44 percent cheaper than renting in the 100 largest metro areas in the United States. While this data was calculated based on last year’s lower mortgage rates, there is still a significant price difference in total monthly costs with today’s rates. And again income vs. home value is tremendously better in Texas than almost any other state that is creating jobs.

Comparatively, home prices are relatively low. Housing price trends vary significantly by location and even by neighborhood, but the average housing price trends across the country look promising for prospective homebuyers looking at Texas versus their current state. The S&P/Case-Shiller composite index of 20 metropolitan areas increased only 1 percent this past season, so 2014/15 could still be a great time to buy.

Because of the lack of dramatic appreciation, there is less competition from home flippers. Housing prices in some markets are increasing, making house flipping attractive. But in Texas it has historically been a lower appreciation value. This gives prospective homebuyers more inventory to choose from and the benefit of having less pressure to close a deal because of another pending offer. This could be the time to enjoy the freedom of shopping around for that perfect home and making an offer.

The majority of renters would like to avoid the cost of rising rent. A buyer’s market means it might be time to say goodbye to renting for good, but Texas is a seller’s market. That said, rent increases historically go up quicker than appreciation. So as you look at shrinking housing dollars at your current location or want to move but will experience a spike in rent, consider the benefits of buying a home instead. You may be able to secure a great rate with your credit history and end up paying the equivalent or less in monthly payments as you build equity in a home. Renting can be a more affordable option for the short term, but renters still have to face rising rental costs year after year.

Presently with Texas real estate being undervalued, there is not a more affordable time to buy. Buying a home gives you a chance to start building equity, and you are investing in your future. Even if you end up selling your home in five or ten years, you could profit from the sale and invest that money elsewhere. If you’ve been dealing with rising rent or the hassles of costly moves for the past few years, settling in to a home can stabilize your housing expenses – especially if you get a fixed-rate loan at a great rate. You won’t have to worry about your monthly housing expenses changing significantly for a few years, and you will pay for something that has more value than a rental property. Consider the benefits of making this type of contribution to your future month after month. Of all the regional markets, look what region has had consistent growth over the last 10 years. Not necessarily explosive appreciation, but affordable. Now is the time to buy in Texas!

One of the enduring lessons of the last real estate bubble is that while there are many reasons to buy a house — like the tax-deductibility of mortgage debt, the forced savings mechanism of paying a mortgage, and the pride of homeownership — expecting unrealistic significant appreciation in your home’s value shouldn’t be one of them. If you are looking at the value or your home / real estate it is more important to look at the last 5 to 10 years history to decide if it is overvalued. Looking at a snapshot, is just that; a partial picture of the total.

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