Article from Austin American-Statesman about a possible national downturn in the housing market

Recently, the Austin-American Statesman ran a story about a speech from Gary Keller, the co-founder of Keller Williams. Keller warned his agents across the country to prepare for a coming downturn in the national housing market. You can review the story here.

I and several other local housing experts were asked to comment for the story. I’ve written a few more things to help you interpret this information in the context of our local market.

  • The Austin market is still robust, but correct pricing (within 95% to 100% of median value) is the key to selling property within the first 30 to 45 days. The exception presently is luxury ($1.5+ million), because of inventory surplus (making a buyers’ market)
  • Luxury slowdown has been a precursor to overall market slowdowns the last downturns, 1977, 1988, 1999, 2005.
  • Gary Keller is commenting on national and international statistics. Because he is headquartered in Austin we tend to take his comments on a local and regional scale. He is looking at a bigger picture than that. I would compare it to Bill Gates making a comment and the effect it would have on the tech world, whether they were associated with Microsoft or not.
  • The ratio of median Austin home cost to median Austin household income is ell within acceptable housing finance parameters Austin household median income $63,603./Austin median priced home $263,900.

-MS

Luxury homes trending towards buyers’ market

Welcome back to the Independence Voice! This week, we will take a look at the state of the national economy, and how it is influencing our local and regional real estate markets.

The Bureau of Labor Statistics released its most recent job report showing that the U.S. economy added only 38,000 jobs in May, far below expectations. That’s much lower than the 150,000 new jobs the economy was expecting. A low jobs report number is a sign of a sluggish economy. The headline number was reduced by 35,100 due to striking workers at Verizon Communications. Without the strike, payrolls would have increased by 73,000. Either way, the jobs growth in May was much slower than it was earlier in the year.

Chart 1

Construction lost 15,000 jobs. That signals a slowdown in the housing market. U.S. manufacturing lost 10,000 jobs due to a strong dollar that hurt exports. Durable goods lost 18,000 jobs, with 500 from auto manufacturing. Pay close attention to how many manufacturing jobs are added or lost each month, since it is a future indicator of economic health. That’s because factories are less likely to add workers until they have orders for more goods in hand. Manufacturing employment provides a better leading indicator of future economic performance than does service employment, which stays more consistent through thick and thin.

The US hasn’t seen such low positive jobs gains since December 2010 — or, in other words, since the aftermath of the Great Recession.

What effect does this have?

  • The US dollar is getting slammed in world currency markets. When there is not confidence in the American labor market, the dollar loses value against other currencies. If the American dollar loses value, you lose buying power. As most of us know wages have not kept up with inflation.
  • With less confidence in the strength of the labor market, stock values drop historically.
  • Consumers are running for the safety of US Treasuries.

Another worrying sign is that the weakness in job creation appears to be spreading across industries.

Chart 2

Earlier this year, only mining and logging, durable goods manufacturing, and transportation were posting job losses. This was easily explained by shrinking domestic oil production as a result of a sharp decline in crude oil prices. Employment in oil extraction (part of the mining and logging sector) was shrinking, as was production of heavy equipment used in the oil sector, leading to job losses in durable goods manufacturing. Transportation of domestic crude oil (much of which is done by rail) was falling as well. There was a possibility that the weakness and the job losses would be contained in the industries affected by crude oil production.

But in April and May, it seems that the job losses spread to other industries. Now, in addition to mining, durable goods manufacturing and transportation, job losses have appeared in construction, wholesale trade, utilities, retail sales, and information services (although the last one is mostly due to a strike). Other industries continue to add jobs, but at a much slower pace than before. This is a worrying sign.

And yet, the unemployment rate still fell in May to 4.7 percent, from 5 percent in April. How can this be? The answer is not encouraging – the drop in the unemployment rate is mostly driven by people dropping out of the labor force. In May, 458,000 people left the labor force, after 362,000 did so in April. Such a substantial decrease in the labor force for two months is a row is unusual (see below) and is yet another worrying sign.

Chart 3

This was a very disappointing employment report with several worrying signs for the economy long term. It makes it nearly certain that the Federal Reserve will not raise interest rates when it meets in June. We will be watching other data carefully to see if the worrying signs seen here are confirmed by other information.

Local impacts

Austin and the other Texas metros continue to be sellers’ markets, with not enough commercial or residential inventory. However there are concerns in certain portions of the residential market, namely in luxury sales in Austin above $1 million.

The charts below show Austin luxury sales are still robust compared to the recession, but slower than 2013 or the highs of 2015.

Chart 4

So what happened? Take a look at the Austin $1+ million inventory report below. It clearly shows that in 2016, luxury above a million sales slowed and the amount of inventory picked up. Inventory doubled since 2015 to 20 months, reflecting a buyers’ market.

Chart 5

Consumer confidence in the Texas region has dropped 35 points in the last year. Consumers are not feeling as flush as they have previously. Luxury is showing it first. Historically the top portion of the market begins to show a slowing of the market first. It is not just a regional thing, we are seeing national GDP and inflation slow dramatically this last quarter. Declines in oil, rumors of another tech bubble, and confusing election hyperbole are causing many to be much more conservative in their selection process.

What would I tell your clients that are buying or selling in the over $1 million price category? It is still a good market if your listing is priced correctly. Those homes that are within 95 to 100% of the median price per square feet are still selling quickly. Be aware of what is in the neighborhood and what is in that price range. Not all houses are created equal. Values cannot be based just on square footage. Sellers will have difficulty moving their properties if they ‘ego price’.

On the demand side of the equation, some have asked if there are fewer companies and executives moving to Austin or other Texas metros. Those at the Chamber of Commerce are still seeing quality companies and executives moving here. However many in the equity business feel that technology is overvalued like 1999, and that there should be a correction. Therefore executives are much more conservative in spending, because of what they are hearing from markets. Trophy properties are taking almost three times as long to sell in Austin as what the rest of the market is doing.  As an analyst, I will tell you if priced correctly it should still sell.

Otherwise it is very much a sellers’ market. Austin is still creating jobs, the rental market continues to be tight, and most homes if properly priced have multiple offers. Real estate appreciation is apparent in all markets, channels, and Texas metros. At most price points there is not enough rentals or homes for sale. Foreclosures and short sells are a non-factor at less than 1% of the market. The Texas real estate market is still strong in all channels, but there is some softening in luxury homes. So yes, the market is changing, and yes we should continue to watch.

 

End of year Texas economic review

It seemed like the Texas growth miracle would never end. Texas has led the nation in job creation and home price appreciation since the end of the Recession. 2013 was a tremendous year, with home price appreciation at 15% or greater in all Texas metros. 2014 saw continued strength but a slowing of demand. At the start of 2015, the Texas region was coming off a good year, yet there was concern about declining oil values, (WTI per barrel high of  ~$105 in June 2014, now at ~$38) and the effect on our region’s economy.

While Texas is still experiencing growth, the effect of lower oil prices and a stronger U.S. dollar has weighed on the region’s economy. 203,900 jobs were added in Texas this year, and employment in December 2015 will be at 11.9 million jobs, just under a 2% increase for the year. But for the first time in five years, the state lost jobs on a monthly basis – 25,200 jobs in March and 13,700 jobs in August, after four months of job gains. As stated before, the state still added jobs overall, even with the job losses from the energy sector. However the job losses signal a slowing of the market in some channels. The state gained 204,800 nonagricultural jobs from October 2014 to October 2015, an annual growth rate of 1.7 percent, lower than the nation’s growth rate of 1.9 percent. This is the first time since the Recession that Texas has added jobs slower than the rest of the nation.

Existing home sales dipped in October, while third quarter exports fell. The employment forecast ticked up, and the estimated value of the Texas Leading Index rose in October following four consecutive months of decline. All metros continued to see great low unemployment numbers, with jobs being created in services, trade, and utilities industries. Looking at employment data through November, it now seems certain that Texas will get through the 2015 oil bust with net positive job growth for the year and continue into 2016.

While the forecasted 1.3 percent job growth is much weaker than the 3.6 percent growth in 2014, it is stronger than that of other energy states and much better than what occurred in the 1980s following similar oil price declines, according to Dallas Federal Reserve analysts. The difference is that Texas is much more diversified today than it was in the 1980s, and its real estate markets were in much better shape heading into this energy downturn. If oil prices remain near recent levels, 2016 job growth will likely remain close to this year’s pace.

Last year, the state gained a net total 103,465 new residents, the second most of any state in the country. Americans relocated with good reason. Between 2012 and 2014, employment in the Lone Star State grew 6.2%, 2.5 percentage points ahead of the national growth rate of 3.7%.

With this growth, housing demand in all metros is strong but with some signs of slowing. Statewide housing sales increased year over year by 9.2 percent this year. All Texas metros, with the exception of Houston, are driving this increase in residential and commercial real estate sales while the border cities record moderate growth. To no one’s surprise, Houston’s housing sales have remained flat in following declines in energy prices.

Houston

Houston is the one metro nationally that seemed impervious to the recession with incredible growth in all channels. Although the annual employment is off 30%, growth is still there. Apartment demand continues strong in the Houston area in the wake of dipping oil and gas prices. The employment picture upside exists as the oil and gas operations consolidate in the Houston area and the continued growth in the area’s medical community. Though the employment growth remained slower this year, these two sectors lead the charge in fueling demand for rental housing. In the eastern portion of the metro and along the Gulf Coast, several petrochemical plants are underway or proposed, stirring demand for Class B and C apartments nearby and driving property interest and values in the area.

West Houston is coming off a several year building boom that has brought thousands of new units online. Softening  has begun to occur and developers are ramping up efforts to lure tenants to recently constructed properties. Developers attitudes about the market are shifting and new developments coming out of the ground are already beginning to slow (if adding 20,000+/- units to the market is slowing). Rent values have slowed but continue in a positive trend with some concessions, except in the class A channel. Occupancy continues to be in the mid 90% range and projected to remain steady in 2016. With a 110,000 jobs continued to be created, Houston’s so-called “slowing” is envied by many.

Home sales slowed but values remained strong. Home sales in the Bayou City saw a 12% drop from the previous year and increase in resale inventory rise from 2.8 months of supply last October to 3.5 months of supply. Inventory has held at a 3.5 months of supply for the past four months, but remains below the current national housing supply of 4.8 months of inventory. Nonetheless, home prices achieved the highest levels ever for an October in Houston. The single-family average price rose 3.7 percent from last year to $271,648, while the median price jumped 6.6 percent year over year to $205,000, and average days on market ticked up slightly from 51 days to 53.

Office space is feeling the brunt of the energy slowdown with over eleven million square feet coming on line this year, surpassing the 9 million that came on line last in 2014. All this office development has pushed vacancy up near 18%, with rents beginning to stabilize after years of increasing values. Hopefully developers will begin to pull back in 2016. Houston industrial and retail have slowed but maintain above national occupancy in the mid 90% range.

Dallas/Fort Worth

Strong job formation (130,000+ jobs 2014, 90,000 in 2015) continues to be the driving force behind the Dallas/Fort Worth metro’s growth, and these factors will play a large role in propelling the market. Many companies are expanding, moving headquarters to the area, and employment additions remain broad in nearly every employment channel. Rising employment in the market is stirring demand for housing, and despite developers bringing nearly 75,000 apartments online since 2009, vacancy has continued to tighten with no concessions and rising occupancy (95+%). Tight conditions combined with healthy rent growth have prompted developers to resume building activity, and developers will deliver 22,000 units this year. Nearly 40,000 apartments are underway throughout the region, and multifamily permitting remains strong in almost all North Texas cities, signaling builders’ continued confidence in the market. Though some softening should occur in 2016 as newly constructed units come online, vacancy should remain well below the last 10 years average. Because of this, rent growth and sales growth should remain strong through 2016 into 2017.

With all the new people and tight rental inventory, home values have continued to improve over 7% to 12% depending on what county you are in North Texas. Home sales are brisk with less than 2.5 months of inventory. In the northern suburbs where business is brisk there is concern of overdevelopment by some due to the number of communities coming online by the end of 2016.

With all the corporations moving to the area, office development is strong with over 7.5 million square feet new in the market in 2015, featuring headquarters space for State Farm, Raytheon, and FedEx, etc. In 2016, roughly 3.6 million square feet was finished. Even with all the office space demand, vacancies will continue to move up to around 20% in the market. Lease concessions continue to be available to larger tenants through 2016 and rent values should continue upward.

San Antonio

Job growth remains steady with the lowest employment of the last 20+ years at 3.5%. This employment growth should remain through 2016, supporting household formation and property values, keeping rents and occupancy strong. Several sectors of the metro’s employment base added a sizable number of jobs during the last 12 months, further diversifying the economy.

The trade, transportation and utilities industry makes up the largest share of metro wide employment, driving demand for B and C class apartment properties throughout the area. The continued healthy pace of hiring in the leisure and hospitality and construction sectors is strengthening demand for these older communities. The number of rental communities built in the 1970s and 1980s offering concessions remains well above the metro average.

Through 2016 the continued growth in the metro’s blue-collar / entry level workforce will bode well for landlords and operators of these properties and will contribute to the strength of the market through 2015. The continued expansion of the local medical community and technology industry is creating thousands of well-paying jobs. Young professionals moving into the market underpin the strong performance of recently built properties. Vacancy at apartment communities built since 2000 has tightened below 5 percent, and the number of these properties offering concessions has dwindled to 3 percent from 14 percent one year ago.

Construction added 5,500+ apartment units in 2015, an increase of 3.2 percent from last year. However because of the demand for lower priced units, multifamily permitting activity is down 70+% from a year ago as builders begin to scale back new developments watching absorption of new inventory. With 94+% occupancy, rents will continue to rise about 5% through 2016.

San Antonio retail and office continue to be moderate in construction and sales with 90+% occupancy. A potential game changer for San Antonio is Microsoft. The tech giant  has bought 158 acres of Texas Research Park real estate controlled by the Texas Research and Technology Foundation.  TRTF officials said the company plans to develop one of the largest data centers in the country at the far west San Antonio site. This type of catalyst could change the dynamics of the San Antonio economy. Do not be surprised by other announcements in the same vein for San Antonio.

San Antonio and Austin are interesting due to their limited bandwidth of where they can expand development to. San Antonio prefers to stay north of I-10 and west of I 35, but moving west is an issue with the government owning so much land. Two years ago we suggested to our Alamo Heights group that the King William area was prime for redevelopment and have seen an explosion as developers look at ‘underutilized properties’ for denser development. We feel that San Antonio has tremendous opportunity with their underutilized properties inside the loop and along it.

The average price of a home in the San Antonio metro improved 10% from a year ago to $231,116 (10% increase), with median values to $187,200 (6% increase). Sales increased by 5% and the market remained a seller’s market with 3.9 months of supply.

Austin

Austin is the last major Texas metro that we will address. Austin cannot continue to grow West due to geography, road infrastructure, and environmental concerns. Do we move east, north or south? Recruitment of new business and organic local growth will be the driver of our city’s economy for the foreseeable future.

Google and Apple have not even begun to hit stride in expansion. Other companies that are moving to or expanding in Austin are Dell /EMC, GMC, Hewlett Packard, the University of Texas medical school, and Emerson Process Management. The potential for continued growth is much greater in Central Texas than the rest of the nation.

The strength of this market is shown by the number of units being brought to the market and absorbed. It is not a secret that Austin has the most expensive housing costs in the state of Texas, and this trend will continue in a slower fashion, even as more supply comes online. While the median household income can still buy a median-priced home in areas surrounding Austin, home values in the core are well out of range for many would-be homeowners. As a result, demand for apartments in these areas has risen significantly as residents seeking to locate near popular employment and cultural districts choose to rent in lieu of homeownership. This is apparent as we see 10,800+/- units brought to the market, following 12,100 in 2014. That type of growth and development has not been seen since the late 80’s in the Austin area. Yet concessions are few, and rents continue to rise, although slower.

The Liberty Hill, Cedar Park, and Leander areas are experiencing rapid growth because they have some of the last affordable, developable land available. Home sales in the $400K to $700K will be the most difficult to move for sellers. Values will continue to improve, just not as aggressively. As a smaller builder, I would stay focused on value for the dollar and keeping labor happy as competition continues to battle for their services. The ability to build entry level homes will present opportunity for large market share for those builders who can do so.

The demand for office space is apparent with the number of construction cranes dotting the landscape. In 2015 3.5 million square feet will be completed, which is the largest amount of space delivered since 2007. Last year, office inventory rose by 1.1 million square feet. The strong demand has kept occupancy in the low 90% range, and rents continue to escalate.

We started this conversation concerned with the cooling of the regional market. Yet, if we look at the numbers, the continued pace of sales and values should continue. All this positive news actually scares me a little, since in my lifetime I have never seen Austin or Texas with this level of potential and few clouds on the local horizon. Time will tell.

 

 

 

 

 

 

 

 

 

 

 

Conservative mortgage rules helped save Texas from the recession

The United States is still recovering from the longest and most severe economic recession since the Great Depression. Real GDP fell 4%, employment 6%, and the headline unemployment rate crossed the 10% mark for only the second time in postwar US history.

As we know now, housing and finance were at the center of the crisis. Home values nationally fell 25%, the first time since the Great Depression that home values decreased nationally. Close to 3 million households lost their homes to foreclosure or a foreclosure alternative like a ‘short sale’. As a result the national homeownership rate has gone from just over 69% nationally to just under 64%, a low we have not seen since 1967.

These numbers illustrate the impact of this recession on our national economy. However realize it affected each state differently. 55% of all residential foreclosures were in 32 counties during the height of the Great Recession, primarily in California, Nevada, Arizona, and Florida (the “sand states”). Some states suffered disproportionately, while others (Texas, Oklahoma, Arkansas, and Louisiana – states tied to energy) avoided the worst of the downturn.

Specific industry employment played a large part in the severity of the downturn for many states. Michigan (automotive industry) and Nevada (gaming and leisure) were largely single industry economies. In the case of the “sand states”, there was over the top speculation in real estate that caused these states to experience unrealistic double digit appreciation, setting them up for a precipitous fall.

Each state has its own laws governing housing finance. These laws have an influence on whether a state’s housing sector is resilient or fragile in the face of an economic downturn. Where residential speculation from 2001 through 2006 was rampant, those states that allowed 100% home equity loans helped fuel consumers desire to spend their equity and use their home as an ATM. Consumers that borrowed 100% spent any cushion of equity that would protect them should values change.

Before 1997, Texas law did not allow home equity loans (HELs), and home equity lines of credit (HELOCs) weren’t allowed until 2003. When Texas real estate law was finally amended to permit home equity loans, it included some of the strongest consumer protections in the nation. Some of the most significant provisions are:

  • The total of all mortgage debt (not just the home equity loan) cannot exceed 80% of the fair market value of the home.
  • Only one home equity loan may be made against a home at a time. While additional financing arrangements might be possible, a homeowner cannot obtain a second home equity loan until the first has been paid in full.
  • A borrower is only permitted one home equity loan per year, regardless of how quickly the loan is repaid, and a home equity loan may not be converted to another type of loan.
  • Land that is taxed as “agricultural” or “open space” may not be used to secure a home equity loan.

Analysts (Dr. Anil Kumar) at the Dallas Federal Reserve as well as myself believe this played a big factor in the lack of speculation on one’s individual home. This conservative financial stance on home equity helped protect Texas consumers from themselves.

As we move forward in the slowly recovering economy, Texas should continue to improve economically and consumers who own homes have an equity cushion should the market slow or become depressed. Those that have concerns about overvalue and bubbles should keep this in mind.

The Texas metros continue to not only outperform the rest of the country, but most of the world economically. The strength of the local metro market will continue with its strong employment growth and quality real estate economy.

So where are we headed in 2016?

Lack of inventory – The tightness of the market is obvious with rents continuing to increase across the market through 2016. Inventory shortage will continue, both new and resale residential inventories are below equilibrium creating a seller’s market.

Economy – Nationally, regionally, and locally economic trends are still positive, but less than robust. Realize that the local economy is one of the best in the country, and that strength should continue through 2016. Locally and nationally we continue to see expanding payrolls, solid consumption growth and regionally strong housing market and a nationally improving housing market.

Values continue to improve in most channels – All channels will have small value increases this year due to great demand and development lending still tight.

Rental demand continues to be strong – Rents in all channels continue to improve. Office, apartments and retail will continue to be strong through 2017. The product you look at today if priced correctly will not be there tomorrow.

Weak wage growth – American and regional wages are not growing the way they should, especially when inflation and other price increases are factored in. Nationally wages inched up a measly 3 cents in October or at an annual rate of 2%, or just ahead of inflation. The economy cannot fully recover with anemic wage growth.

Fewer cash buyers – The strength of the Texas market has not generated near the amount of cash buyers as other more depressed markets, due to the lack of discounted values in residential or commercial. Nationally cash buyers purchased by individual investors slowed down to 12% of the total national market.

Foreclosures will continue to be a non-event in most Texas markets due to demand of the market. Yes there will be some, but they will be less than 1% of the total market.

Lending will continue to be tight in comparison. Mortgages and development loans will continue to maintain strong underwriting standards. Although there is a lot of talk about sub-prime, there is little in the market. This in turn causes tightness in all markets and escalating values.

Interest rates – expect rates to rise in 2016. Rate adjustments will be incremental (less than 50 basis points) and tied to economic performance. The Fed will continue to monitor US economic trends and global volatility to guide its decisions. Steady job growth (led nationally by our region and Austin specifically) and continued strength of consumer spending support an increase in the benchmark rate charged by the Fed.

The opportunity to build wealth through real estate is leading many to invest in Texas. If you are planning on investing in this market, I would not wait. We will not see values or lending rates again like this again in our lifetime.

Enjoy low interest rates – for now

In September, the Federal Open Markets Committee, the Fed’s policy setting arm, decided not to raise its benchmark rate, which has been near zero for seven years. The benchmark rate is what a central bank issues which other interest rates are calculated against. Also called base interest rate, it is the minimum interest rate investors will demand for investing in a non-Treasury security.

Ahead of the meeting and even after, there had been little certainty about what the Fed would do, but a good number of analysts believed that the economy had improved enough to compel the Fed to raise rates. It turns out that rates are not going up anytime soon. Why?

In a word, September’s employment numbers were ugly. Only 142,000 jobs were added, which is well below the average for the year (approximately 200,000), plus we lost more than 59,000 jobs in revisions to past months. Historically, August sees the biggest upward revisions of any month on the numbers reported, so the report was extremely disappointing. Additionally, 350,000 workers left the labor force and wages dropped during the month. I think this ends any possibility of the Fed raising rates later this month or potentially this year.

The most depressing statistic in the report is that labor force participation rate — the fraction of all Americans over 16 who are working (as opposed to unemployed or simply not looking for work) — is the lowest it’s been since 1977. The falling participation rate is a long-term trend during the last 10 years. Some of it is due to slow business growth. And some is simply due to Baby Boomer retirement and young adults staying in school longer. But the bigger factor is the lack of strong well paying job prospects. As stated before, the lack of wage improvement over the last ten years is nonexistent.

At the same time, though, there are still a higher-than-normal percentage of people who are underemployed — an indication that the US still needs millions more jobs.

What does this mean to you and your clients? At this point it looks like rates won’t be raised until mid-2016 at the earliest, so now is a great time to buy to lock in low interest rates.

Regionally, commercial and residential property sectors continue to perform well, particularly in our Texas metros. This extended period of low interest rates probably won’t be seen again in our lifetime. The good news is that low rates and high demand continue to drive property appreciation. If anything it puts more pressure on finding the right opportunity for clients with the knowledge that values and rates will rise over the next year.

Regional job growth continues, generating new commercial space demand that dramatically outpaces construction levels, and vacancy in the primary property segments remains on track to decline this year and support additional rent gains across the region. Apartment construction has slowed in our metros, but favorable demographic trends and challenging conditions for first-time homebuyers will continue to sustain extremely low vacancy in the multifamily sector.

The potential move away from zero interest rate policy, for short-term rates, is a harbinger of higher mortgage rates ahead and the beginning of the end of this seven-year era of incredibly low mortgage rates and corresponding high affordability. It will be a shock to many homebuyers under the age of 35. Forecasts for mortgage rates vary, but indicate a potential increase of 50 basis points over the next 12 months.

A 50 basis point ( ½ point) increase in the effective mortgage rate could result in the following outcomes:

  • A 6% increase in monthly payments on new mortgages.Nationally the average 30-year fixed mortgage was $231,000, with a monthly principal and interest payment of $1,107 at the average interest rate of 4.03%. When rates reach 4.53%, that same loan amount would result in a monthly payment of $1,175, an increase of 6%.
  • As much as 7% rejection of mortgage applications. The increase in the monthly debt burden as a result of higher rates will stress the upper limits of loan- and debt-to-income ratios for new loan applicants.
  • Average debt-to-income ratio to increase by 4%.The average debt-to-income ratio for mortgages in the first half of 2015 was 35.5%. With an increase of mortgage rates by 50 basis points and keeping all other factors equal, the average debt-to-income ratio increases by 4% to 37%.
  • Popularity of loan types will likely shift with rate increases.In the first half of this year, conventional mortgages were most popular, capturing 50% of the market, followed by 31% FHA, and 12% VA. Under the modeled higher rate scenario, conventional and jumbo mortgages were most likely to hit an upper limit on debt-to-income ratios, and VA and FHA loans were least likely to hit an upper limit.
  • All of this is based on values remaining stable. In this region we have been blessed with continued appreciation. So the buyer that waits loses potential appreciation.
  • Conclusion: today’s buyer can afford ~6% more home than when rates do rise.

The effect on demand won’t be so much on volume as on housing type. If and when there is a rate hike, the most common response from buyers will be to lower their price range. So don’t expect to see a big impact on demand, but that demand will be slightly redirected toward lower priced homes.

Secondly, as stated above Texas has great opportunity with continued demand for investment properties that show strong return. With rates this low and healthy demand, opportunity for better returns in our region versus other parts of the country is obvious.

The good news in this region is we have not had over stimulated appreciation as other parts of the country have had or what the market saw before the financial meltdown. Sure, Texas has had a good run for the last few years with 8.12% appreciation last year, but only 25.99% over the last 5 years or 139% since 1991.

When you compare the Texas region to the rest of the country over time, you can see that regional appreciation has been slower than much of the country. At times in the last ten years, the Texas Region has been the lowest in annual appreciation.

The point is that metros in Texas continue to be attractive compared to the rest of the nation. The healthy slower appreciation coupled with lower rates present tremendous opportunity for those comparing risks for real estate and financing in other parts of the country.

If you are thinking about buying, you have been given a reprieve for another six months or so as rates stay at the second lowest they have been in the last hundred years. Most buyers believe rates will rise soon, and today’s low rates are a key driver motivating people in the market to buy now.

 

 

Texas metros remain sellers’ markets

We are in interesting times. Texas metros have had hot real estate markets for the past five years. For the last few months, we have had questions at both end of the selling spectrum. On the one hand, we are still seeing a sellers’ market in terms of inventory and demand. On the other hand, we are seeing homes at certain price points taking longer to sell and some values softening. What’s going on?

First let’s examine the dynamics of the national, regional, and local real estate markets to answer those questions. Again I look at this not as a seller, buyer, or broker. I’m a developer and a real estate and equity analyst with forty years of watching the Texas market.

Presently there are eight metro areas with a population of over a million nationally that have fully recovered from the recession. “Fully recovered” means they are at or above pre-recession GDP, employment, and real estate values. Four of them are in Texas – Austin, San Antonio, DFW, and Houston. Only 2% of our nations counties have fully recovered. Those cities carry a lot of economic weight, but can’t carry the nation by themselves.

Dallas / Ft. Worth, San Antonio, Houston, and Austin continue to be sellers’ markets based on the lack of inventory and high demand in all real estate channels. What constitutes a sellers’ market? Analysts consider six months of supply as equilibrium. Above that it is a buyers’ market, below a sellers’ market. A buyers’ market is where the buyer trends show sold values being 7-10% less than asking price and other concessions are common. Historically in a sellers’ market the seller is able to sell within 2% of their list price, often with multiple bids. The Texas region has not been in a buyers’ market for nearly five years in our major metros.

The only city that has seen sales slowing is Houston. Low oil prices have caused employment growth to slow. Houston is not as robust as it has been for the last five years, but sales continue to remain relatively strong. At 3.4 months of inventory, it is still solidly a sellers’ market. Demand for commercial real estate has slowed as companies are pulling back on expansion plans. The good news is that there is not the speculative commercial space that we have seen in previous years.

So, if you live in one of the Texas metros, what type of market are you in? These number are from the Texas A&M Real Estate Center.

NL Graph 9-18

Attached are our breakdowns of the Austin and DFW residential markets by zip code. Local real estate data is very important, because even though these metros are broadly sellers’ markets, specific areas have more inventory and are hinging closer to buyers’ markets. You have heard this for years – all real estate is local. Neighborhood values can be dramatically different and it is important for sellers to sit down with a real estate professional to price their inventory correctly.

If priced correctly, homes in all price points in Texas metros should sell within 60 days. However be aware of each local neighborhood, because a few areas of each metro are taking 3 to 4 times longer to sell than the norm in that area. Homes under $1 million if priced correctly should sell within these parameters.

Those sellers that argue with this logic need to step away and look at it from the buyers’ perspective. Let’s look at the logic of setting the proper value against an inflated value when placing your home on the market. A great example is the value of the dollar; if I take a dollar and walk back to where we have our cubicles and ask $.90 for it, there is a chance I may have multiple offers up to the true value. The point of this is that buyers are not going to overpay in this market in general and will not take the time to look at a home that is out of line with fundamentals. Would you?

Demand for shelter, whether for sale or rent is still strong throughout all our metros. Jobs are still being created. There is not enough shelter for everyone moving here. As long as Texas and our metro have strong job creation there will be demand for Texas homes.

Home sales in general were slower last month. In Austin, this last month ABOR reported residential values rising, but the number of sales slowed just a little. Rates kicked up a bit, slowing sales. Values have continued to increase, which has made buyers wary. Yet the naysayers want to say the ‘overvalued bubble’ has popped. That’s not what the numbers show presently. There still is not enough inventory in most channels. It is not a softer real estate market.

Some metrics in housing (higher price points in certain neighborhoods) may be showing signs of a slowdown temporarily, but one thing that is evident is housing demand continues to strengthen. Values, inventory, and other analytics need to be reviewed if selling your home in a timely manner is important. Check with your real estate professional to see what values and inventory are doing in your specific neighborhood.

Total home sales nationally increased to nearly 6 million annualized in June. This was the fastest pace of sales since before the financial crisis and is a clear sign that the housing market is gradually normalizing. Granted, people may not have the income to keep pace with growth of home prices nationally or locally. And credit restrictions are either too tight or too loose, depending on which assumptions you start with. But demand is strong, particularly in Texas and that’s a critical component of the whole supply, demand, and price thing that often gets put on the backburner.

What we are seeing is a readjustment of the market in some neighborhoods. With the potential of rates increasing this year, the ability to buy as much house as you can today will disappear. A one percent rise in rates is a 12% loss in buying power. All buyers want the best possible buy and all sellers want the most profit they can get. The happy medium is to look at the analytics and buy or sell at the right value.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2015 Texas Midyear Review, Part III

This week, our series on the major Texas metro real estate markets shifts its focus to San Antonio. San Antonio continues to see growth near or above prerecession numbers, unlike the majority of the country.

After a slow start to 2015, economic activity in San Antonio picked up in May. Jobs grew at an annualized 2.9 percent, slightly better than the state’s overall rate of 2.1 percent. Jobs creation should end up just above 20,000 jobs for 2015. However this is 30% less than last year’s total of over 33,000. The tepid start was due to low oil prices and the subsequent downturn in energy employment starting last November and continuing into 2015. That said, San Antonio’s unemployment rate continues to look good as it fell once again to a very low 3.6 percent, putting it in the top ten metro markets in unemployment, while rates in Texas and the U.S. ticked up to 4.3 and 5.5 percent, respectively.

San Antonio’s new oil industry and the breakeven prices for the Eagle Ford shale (which hover between $45 and $55 per barrel) will continue to have an impact on employment. Should oil prices drop below $40 per barrel for an extended period of time, the Alamo city’s outlook could change dramatically. The good news is that employment growth will be largely dependent on non-energy-related sectors such as healthcare, education, and professional and business services (all with long term, well paying jobs) this coming year. As a result, despite some weaknesses stemming from slowing Eagle Ford Shale activity and the strong U.S. dollar, year-to-date job growth in San Antonio is 1.5 percentage points above that of Texas.

The Alamo City is growing its military presence, even as other cities are seeing base closures. San Antonio was chosen for a new Air Force Installation and Mission Support Center. This center should bring 350 military and civilian jobs to the metro this fall. Because of the short-term nature of many military jobs, apartment operators near the base will benefit.

Office

For the last few years, office development and construction was playing catch up to increased market demand due to oil growth south of the city. The good news is that any excess office is leased and many office tenants are outgrowing their existing footprints and looking at the market for new locations, which is accelerating demand for office space. Office developers will complete 1 million square feet of office space in 2015, raising total inventory 1.6 percent. That is over double of last year’s absorption. Solid occupancy of 86% with absorption of over a million square feet in the metro area will allow office rents to climb modestly. San Antonio’s most challenged office market (CBD at 80% occupancy) continues to improve also. 2015-16 will be interesting for developers looking for financing, with less than 40 percent of the total square footage scheduled to come online this year preleased. The large volume of speculative construction could create temporary concessions in the market while the lenders continue to watch absorption in a challenged market. However remember that the growth seen in all Texas metros, including San Antonio, is better than the vast majority of the country.

Multifamily

Apartment construction will remain strong with 6,500 apartments being added this year following 6,300 in 2014. Given San Antonio’s population growth and the popularity of renting among young professionals and transplants, we expect these units to be absorbed quickly and occupancy to remain around 92 to 93% with rents rising about 5% annually.

Many young professionals are moving into the SA area as job openings increase, creating demand for class ‘A’ rental housing nearby. Employment growth is led by professional and business services, financial services, and information technology. In addition strong hiring in the education and health services sector and leisure and hospitality industry will help diversify an economy heavily dependent on the military.

These young professionals are not obligate renters and many are looking to buy, considering San Antonio housing is the most affordable of the major Texas metros. According to Texas A&M Real Estate Center data, the June 2015 median price for a home in Austin was $270,100, Dallas $243,000, Houston $222,000, and San Antonio at $199,200.

However, young workers want to work, entertain, and shop near where they live. The redevelopment of the Pearl District is a great example. The majority of these young adults will stay in rentals, particularly in live-work-play neighborhoods where the cost of ownership is typically more expensive than the metro median priced home. Any softening in the market should be short term as deliveries decline drastically after this year and demand has the chance to catch up with the influx of new supply.

Retail

Developers will complete 1.5 million square feet of retail space in San Antonio this year, much of which is preleased. Rents continue to grow modestly with vacancy remaining unchanged. The bulk of the new retail development taking place this year is largely concentrated to the northwest and northeast, as builders and retailers seek to capitalize on strong demographics in this portion of the city. San Antonio is beginning to see development of core inner neighborhoods (King William district, Federal district) into a live-work-play atmosphere, which in turn spurs equity and developers to relook at this market.

H-E-B is planning for a new store downtown. Although the location will be smaller than the grocer’s normal footprint, it will be the first full-service grocery store in downtown San Antonio in years. Having a grocer convenient helps inner city growth dramatically. The majority of space coming online this year is preleased, and the lack of inventory will facilitate the backfill of a few remaining large spaces left over from the recession.

Single family residential

With resale inventory at 4.0 months of supply, San Antonio remains a sellers’ market. Home sales and values continue to improve from a year ago. As stated earlier we are seeing inner city values improve dramatically due to heightened demand from consumers and developers. Some have questioned these higher values and have even suggested the development of a new housing bubble. These fears are misplaced – presently those properties seeing strong appreciation are in inner city locations where new construction is beginning to replace 50+ year old structures due to the closeness of the neighborhoods. Accelerated housing appreciation is due to the market dynamics of strong demand met with limited supply, not speculation.

San Antonio median home prices increased 5.5% year over year from June 2014 to June 2015 and now sit at $199,200, while average home sales price remains strong at over $240,000. New home sales remain slower with about 10,000 starts this year. The strength of the market continues to be north and northwest including New Braunfels. The low inventory of homes and a 5%+ increase in construction help-wanted advertising in May / June suggest continued strength in residential construction in the months ahead.

The strength of the San Antonio market is its steadiness and affordability. Consumers and investors alike will continue to see values increase. The availability and affordability continue to attract industry. In San Antonio as rental affordability declines and mortgage rates remain low, more first-time homebuyers are being drawn towards homeownership but many prospective buyers are up against the low inventory problem. In almost all real estate channels San Antonio should continue its steady rise.

 

 

 

 

2015 Texas Midyear Review, Part II

We are continuing our review of the major metro real estate markets in Texas. This week we will spotlight Dallas / Fort Worth.

Five Texas cities were among the top 10 U.S. cities in population growth between July 1, 2013, and July 1, 2014 — Houston, Austin, San Antonio, Dallas and Fort Worth, with each adding between 18,000 to almost 36,000 people in that 12 month period.

nl graph 8-7

Jobs

Texas continues to attract transplants from other states due to stellar job creation. In 2014, Dallas / Fort Worth added 112,100 jobs, and in 2015 we should see a 3.6 percent increase. Over the past 12 months, the Metroplex has created jobs at a 3.3 percent rate, second only to Austin, which grew 3.6 percent.

The economy in the Metroplex flourished in the first five months of 2015 and added more than 100,000 jobs year over year through May to outpace the rate of growth for the entire state. Statistically, one new job can support 2.6 new residents, so DFW is still on the course of continued population growth.

In June, the unemployment rate fell to 3.7 percent in Dallas and held steady at 3.9 percent in Fort Worth, while edging down to 4.2 percent in Texas. All three figures are lower than the U.S. rate of 5.3 percent. Unemployment in both Dallas and Fort Worth is below its prerecession low of 4.1 percent. Remember that 4% unemployment is considered near full employment, because there will always be some number of peole in between and looking for jobs.

Office

Five years ago there was an abundance of vacant office space due to the recession. The good news is that professional and business services payrolls, for example, are 18 percent larger than the pre-recession peak through year-end 2014, while financial services staffs expanded by a similar amount. Since those previous thresholds were reached, office inventory has grown only 6 percent. This has obviously put a strain on finding office space, which is good news for landlords and developers.

Further gains in employment in these major office-using sectors will continue to help alleviate the supply imbalances that will arise in the months ahead. Developers will finish 7.5 million square feet of office space this year, featuring headquarters space for State Farm, Raytheon and FedEx. To put that in perspective, last year roughly 3.6 million square feet was finished and absorbed. Supply will grow and should outstrip demand temporarily, moving vacancy closer to 20% for the 12 county area. That said, most of north Dallas and the northern counties will continue to be challenged as office space is at a premium. There have been close to 20 million sq. ft of expansions and relocations in 2014 -15 announced, with more certainly coming.

Apartments

Apartment developers will complete 20,000 units in the Metroplex in 2015, increasing inventory nearly 3 percent. This year deliveries are up from the 15,600 units completed in 2014 and will be the largest addition to inventory in more than a decade. As in the office channel, apartment supply will outstrip demand. However 94% occupancy is a healthy market as evidenced by continued rent increases. The good news is that more deliveries that were scheduled for 2015 /16 have been delayed, keeping the market healthy for developers and equity.

Retail

Developers will complete 3.0 million square feet of retail space in the Metroplex this year, of which more than 90 percent is pre-leased. Last year, developers brought 2.9 million square feet of space online. Rents will continue to rise, advancing 2.6 percent year over year. This is down slightly from the 2.8 percent growth in rents realized in 2014.

Single family residential

With resale inventory at 2.2 months of supply, the Dallas area leads the country in home price gains presently. Median home sales prices are more than 10 percent higher this summer than a year ago. In some neighborhoods the price hikes this year are two to three times that rate. Prices for homes are up 30 percent in Oak Cliff, 29 percent in Fairview, and 22 percent in North Dallas in the first six months of 2015. Additionally, prices were up 15 percent or more in a dozen other Dallas-area neighborhoods, according to a midyear analysis of the North Texas home market based on data from the Real Estate Center at Texas A&M University. Those areas seeing strong appreciation are in inner city locations where new construction is beginning to replace older homes.

Single-family home construction has continued to increase in the Metroplex. Year to date through May, single-family permits are up 30.5 percent in 2015 over the same period last year. The ability for employees to be able to afford a home compared to most areas in the nation may be the single biggest cause for this push. New home construction is around 30,000 to 35,000 homes a year. While this places DFW among the nation’s most robust building markets, it is still less than 50% of the number of new homes being built before the recession.

DFW median home prices are at an all-time high of $220,000, and homes are selling for about 60 percent more than they were at the worst of the recession in early 2010. Overall, Dallas / Fort Worth and its suburbs have a well based multi-industry growth that should maintain its strength over the next 4 to 5 years.

 

 

2015 Texas Midyear Review, Part I

Of the 3218 counties in the US, only 65 have fully recovered from the recession. By “recovered”, we mean that employment is back to prerecession numbers, GDP is same or better, and real estate values are at or better than prerecession. It’s important to understand this context when talking about the market in Texas, where all of our major metros have recovered and surpassed prerecession benchmarks.

Over the next few blog posts, I thought it would be appropriate to review the fundamental numbers of each major Texas metro. This piece will focus on Austin.

Jobs

The economic success of Texas and it’s major metros stems from robust job creation. The state’s economy gained 276,400 nonagricultural jobs from June 2014 to June 2015, an annual growth rate of 2.4 percent compared with 2.1 percent for the United States.

Austin added 32,200 net new jobs, or 3.5%, in the 12 months ending in May 2015, making it the eighth fastest growing major metro in the US. Travis county has the third best growth rate for counties over a million in the country.

May’s 2015 year-over-year job growth is higher than any month since last October 2014. In the same time frame, the number of unemployed has declined by 10,039 or 23.3%. At 3.2%, seasonally adjusted unemployment is at its lowest level since before the early 2000s “dot-com” recession for the city.

Single family residential

June 2015 MLS statistics

  • 3,051 – Single-family homes sold, five percent more than the previous year in June 2014 and an increase from May 2015 of almost 300 units, a 9% increase.
  • $272,250 – Median price for single-family homes, eight percent more than June 2014. Not varying much from previous month, only $2500 more.
  • $333,866 – Average price for single-family homes, two percent more than June 2014. Due to more inventory in lower price points we saw average values decrease this month ($15,000) from the previous month.
  • 42 – Average days on market, a continued sign of a healthy market. 24 days better than the nations average.
  • 3,812 – New single-family home listings on the market, three percent more than June 2014. Down from the previous month. For a population of close to two million in the metro, these is not enough to keep up with demand.
  • 8 – Months of inventory of single-family homes, unchanged compared to June 2014. It continues to be a sellers’ market, with little room for negotiation on asking values.
  • $1,018,625,166 – Total dollar volume of single-family properties sold, eight percent more than June 2014. This is the first time ever of over a billion in home sales in the Austin area.

Multifamily residential

For a number of years now, occupancies in central Texas have stayed at a very healthy 93 – 96%. At the end of June 2015, occupancy stands at 93.6% Equity and investors have aggressively pursued product in this market, which is one of the reasons multifamily sales and construction have been so strong.

Rent values continue to increase, even with over 16,300 new apartments brought to the market in the last two years. Average rents have grown more than 32 percent in the same timeframe. With the number of units brought to the market, you would think occupancy and rent values would drop. Yet the market has absorbed all new units, and is clamoring for more. The strength of this market has helped investors in all classes of residential investments. Sales have been brisk, with most well valued properties receiving multiple offers.

Strong demand combined with the slower entitlement process for real estate development has heightened demand for housing. The undersupply of housing is elevating both single-family home prices and apartment rents. Since 2007 the median single-family home price rose 37+/-% and is one of the reasons a large share of the metro’s sizable young-adult population are pushed to the suburbs, unable to purchase homes in desirable areas. This, in turn, is driving demand for area apartments in CBD and inner ring neighborhoods.

Retail

Deliveries of new retail in Austin will be below the past three years’ retail boom, as builders bring just 500,000 square feet of retail space online during 2015. Last year, retail developers completed 726,000 square feet of retail space in the five county Austin area. During the last four quarters retail developers completed approximately 370,000 square feet of retail space, including 35,000 square feet of space brought online in the first quarter of 2015

The largest concentrations of new retail were 90,000+ square feet of space concentrated in the Cedar Park area. South Austin followed, with nearly 70,000 square feet of space. The largest project under construction in the Austin metro is the 82,000-square-foot retail portion of South Lamar Plaza in South Central Austin. The retail portion is scheduled for delivery midyear and consists of retail, restaurants and theater space already open. The mixed-use project also contains apartments.

Strong preleasing and rising demand from retailers to expand in the market kept occupancy above 95%, continuing the trend of the last three years. These numbers are dramatically better than the rest of the nation and reflects the strength of the market locally. Tightening conditions in the metro and a lack of new supply coming online will contribute to asking rents rising 3.5 percent to $18.89 per square foot this year. Average asking rents grew 2.8 percent in 2014.

Competition for single-tenant assets remains fierce, forcing some buyers to shift their focus to two- to four-tenant strip centers, leased by na­tional and regional credit tenants, on outparcels of anchored developments.

Office

Approximately 2.9 million square feet of office space will come online in 2015, up from 1.1 million square feet last year. The three largest office buildings that opened during the first quarter averaged 78 percent full. This aggressive preleasing shows the huge appetite for office space in the Austin metro. Strong net absorption is projected to continue this year, tightening vacancy and lifting market rental rates.

Despite the surge in deliveries throughout the metro this year, which will reach 3.2 million square net absorption feet in 2015, occupancy is still around 88%. Asking rents will advance 4.8 percent in 2015 to $29.43 per square foot citywide. Last year, rents increased 4.3 percent.

Forward

The Texas metros have been blessed in their recovery from the recession with some of the shortest turnaround times in the nation. Locally and regionally we sometimes forget that and think the rest of the nation must be doing just as well.

We are over three and a half years into this positive market. Six years is the longest positive run I’ve seen in my 35+ years in the region. With job creation and demand continuing, Texas still has a ways to go for supply to catch up to demand. It’s not bragging, just facts.

Hopefully, these numbers will convince you of the robustness of the Austin market. We will visit Dallas and San Antonio in the next few installments.

 

 

Mid-year condo report doesn’t tell the whole story

The Texas Association of Realtors released a report about condo sales in the Austin, DFW, San Antonio, and Houston metro areas. Values are strong in all, and sales are strong and improving except for Austin.

According to the report, Austin, Dallas, Houston, and San Antonio experienced an aggregate 1% decrease in condo sales between January and May 2015. While Dallas and San Antonio posted small annual gains of 3% and 6%, respectively, condo sales decreased 1% year-over-year in Houston and 12% year-over-year in Austin in the first half of the year. This sparked misplaced concern in Austin that the market was overvalued and over built.

Despite the short-term decline in sales in Austin, prices are up. The median price has increased 4% to $222,000, and price per square foot is up 9% to $222. There are 14% more listings, but units are selling faster with an average of 43 days on market. The important take away is that you cannot pick and choose one statistic and generalize an entire market. The headline of the linked article could easily be, “Condo market sees higher prices and faster sales”.

The reasons that sales are improving in Dallas/Fort Worth, Houston, and San Antonio areas is those markets are showing stronger development of condos in many of the older, central communities. Austin is about 10 years ahead of this curve with phenomenal acceptance of Central Business District (CBD) living, with over 10,000 living in the Austin CBD presently. The other Texas metros have begun to see this same level of interest in their downtowns.

Realize that downtown and inner ring living in Texas metros has not been that popular until the last few years. The demand for downtown has been driven by employment as well as desire to have a permanent residence where one can live, work, and play without commuting.

In reading this report, my first question is about inventory. Not all inventory that is available has been included. Two major residential towers in downtown Austin have not started construction, even though they are a 95% sold out (reservations with escrow money deposited). If you look at the values quoted for median ($222,000) and average ($284,089) values, they are very affordable comparatively to single family in the same neighborhoods.

Sales are a product of the market, and if buyers cannot find the product they want, they will wait for it. Presently, values are not being driven by speculation. Successful multifamily sales historically are 15% to 20% less expensive then the same single family square footage in the neighborhood in Texas. You can’t use this formula with CBD (Central Business District) multifamily because of lack of single family detached.

Unfortunately the higher values of the Austin CBD condos have captured everyone’s attention and focus. Also most condo resales, if priced properly, are seeing multiple offers, which is not a sign of a slowing demand on the market. In a given market if you continue to see multiple offers on properties, even though sales may slow, don’t make a snap decision that the market has an issue. Step back and look at the parameters of that decision. How much inventory is available? Less than sixth months of inventory is a seller’s market. All residential channels in Texas metros are a seller’s market due to limited inventory and high demand.

There is the question of affordability in certain areas of town. Values continue to rise strongly in the CBD and inner ring neighborhoods here in Austin and our other Texas metros. According to ABOR MLS statistics, larger downtown condos are going for over $750 per square foot – a lack of supply of 3 bedroom and larger condos has driven values of such units up. This is unusual – historically it’s the smaller units that are priced her per square foot. Note that many high-end condo transactions take place off MLS, and we’ve heard of large condos going for over $1100 per square foot.

Most residential properties in downtown areas are priced above what the median income can afford. The primary buyers for these closer in residences have always been buyers with substantial assets. Also realize that affordable housing has never been the highest and best use for CBD and inner ring land historically. Desirable, yes, affordable, no.

When will rising values downtown slow purchasing? As long as Austin and Texas metros have strong job creation there will be a desire for having a ‘place’ in Austin or your respective community.

Be reminded that Austin home sales in general had a slower month in June. This last month ABOR reported continued residential values rising, but the number of sales slowed just a little, which is probably a healthy respite for the market. Interest rates kicked up a bit, slowing sales. Values have continued to increase, which has made buyers wary. Inventory is tight in desirable neighborhoods. The biggest complaint is there is not enough inventory in the inner neighborhoods.

Yet the naysayers want to say the ‘Austin bubble’  has popped. That’s not what the numbers show presently. There still is not enough inventory in most channels. Not just residential, but across all real estate channels presently in most of state, particularly in the four major metros. The driving force of the market – job creation – is still here and continues to mature. Demand should continue based on job creation and relative affordability, compared to other job creating metro areas nationally.

 

 

 

Markets find their own values

Texas and its metros continue to be singled out as overvalued by different sources. The map below from real estate analysts KCM, using CoreLogic numbers, shows when the states saw peak prices and how far they are from that pinnacle.

As you can see Texas is just now hitting the highest values they have seen in history. The seven states in dark blue are currently at their peak. Take a look at these states; are these the normal states you would associate with being overvalued? No. What those states show is demand for shelter outstripping supply. All have strong employment as shown by their low unemployment numbers: Wyoming (4.1%), Colorado (4.2%), Nebraska (2.6%), Oklahoma (3.9%), Tennessee (6.3%), New York (5.7%), and Texas (4.6%).

nl graph 619

Real estate values and local economies have not fully recovered in the majority of the nation. With only 2% of the nation recovered, people are flocking to areas with steady employment. How can you say they are overvalued? Again those markets that are seeing great job creation will continue to see values rise as new employees look for shelter.

Two trends from the previous real estate and housing boom were related to loose lending standards. New homebuyers could get mortgages they would not normally qualify for, and many of those new borrowers had to put down little or no money up front. Combining these two forces resulted in a massively leveraged housing market. This in turn encouraged a high level of speculation in certain markets with leveraged money. We saw the end result – a massive financial meltdown resulting from the flawed idea of ever-appreciating real estate and loaning money to unqualified applicants.

Good news from a financial side is this is no longer the case. This lower leverage may be the most important difference between the housing market today and the housing bubble because it reduces the risk of a major downturn. It allows the ratio of the total level of mortgage debt to the overall market value of real estate to be realistically valued. This adjusts the amount of leverage and debt in the housing market by the total size of the market.

The current ratio of real estate wealth to mortgage debt is around 44%. This is a lot healthier than the higher 63% of mortgages to real estate value of 2Q09. This lower loan to value ratio should allow financial markets to weather potential shocks to the system in the future. If highly leveraged real estate and high levels of residential speculation becomes popular again, it would be wise to proceed cautiously with real estate investments.

Affordability for Millenials

There’s been a lot of chatter regarding a recent Bloomberg report about the 13 cities where Millennials can’t afford to buy a home. No Texas cities made the list of 13, but Austin was close behind at #16. I can’t disagree with the article, but it has to be viewed in context. Cities that are creating jobs have the highest demand for shelter, which in turn increases prices. The alternative is a lack of employment and declining prices.

As you know, home buying is not just about shelter. Buying a home has traditionally been a way for young families to begin building equity and wealth. Saddled with student debt and facing grim employment prospects, Millenials have had difficulty gaining economic traction since the recession.

When I look at the numbers and demographics, the trend I see is that Millennials are waiting longer to have a family and afford a home. So if anything, the future looks bright for those in the housing / shelter industry. Rents locally have increased 70% the last 10 years. In the same time frame, residential appreciation has improved 35% to 38% in the same time period, and wages 10%.

Does this mean Austin and other job creating cities are ‘overvalued’? No, they are responding to demand, which in turn is caused by employment growth and opportunity.

How do lake levels influence lakefront property sales?

NL Graph 6192

2005-2006: Drought, this one with statewide losses of $4.1 billion. A two-year drought begins in 2007, with a brief respite in early 2010.

2010-2015: The current drought arrives. From October of last year to September 2014, rainfall averages just over eleven inches, making it the driest year in Texas history. Agricultural losses are estimated at $5.2 billion and counting.

Lakefront property sales can be influenced by the level of the lakes. However, don’t think you can sell over market value with lake view becoming lakefront again. We went back 40+ years and saw very little difference in overall values for waterfront, drought or full. The slide above shows the last 10 years. What we did see is that when lake levels return to full, waterfront begins to sell with greater velocity. When there is a drought, sales dry up.

The graph shows median values are better when the lake is full, but waterfront values don’t get a premium when the lake is high. No one wants to pay top dollar for a dried up dock with no guarantee that they will ever have a true waterfront again. We have seen this drought happen many times over the last seventy years with lake levels returning to full and falling again. With lakes closer to full, sellers are not as willing to negotiate due to more buyers interested.

Those who think that values should increase with the lake currently at 80% full should consider the opposite scenario – is the property only worth 80% of its value when the water line recedes in the drought?

No one knows when Lake Travis, originally a flood control reservoir, will be full. I have yet to find anyone who is willing to bank a large investment on this assumption. I would think when lakefront is in a drought, it is probably easier to negotiate a sale due to the emotional value of waterfront and the consumer that thinks values are lower due to the lack of water. Each market finds its own value.

 

2015 points to slower growth ahead

Last year, the U.S. job market had its best year of gains since 1999.  Economic activity hit a whopping 5% in the third quarter, the best quarter since 2003. On the other hand, employment is still relatively weak with only 2% of the nation’s counties recovered to prerecession unemployment, GDP, and real estate values.

Unemployment is better and hiring remains strong, but most experts are starting to scale back their growth forecasts. The Federal Reserve has kept rates near zero since 2008 and bought $3.5 trillion in bonds to pull the economy from a recession that had sent joblessness as high as 10%. The good news is that unemployment has now been cut almost in half from the recession, and runs near estimates of full employment, and monthly job growth has averaged 194,000 this year. It has been many years since we have achieved the magical 300,000 jobs per month needed for a healthy economy.

During 2014, jobs grew at a healthy 3.6% and over 409,000 jobs were created with the unemployment rate dropping to the lowest rate since May 2008. While inflation is below target in 2015, oil prices are off their lows of 2014, and the soaring dollar has come down from peaks scaled in March, which should support U.S. prices.

With the slower economy this year, phrases like “secular stagnation” and “new normal” have resurfaced to describe an economy doomed for years of slow growth. The economy is a heck of a lot better now than it was six years ago. But it is definitely not booming.

Federal Reserve chair Janet Yellen summed it up well in a speech March 27 of this year, “If underlying conditions had truly returned to normal, the economy should be booming.” The chairman has said that the economy is better and that unemployment should fall to near 5 percent by the end of the year. She cited the fact that more are quitting their jobs as evidence that people have “greater confidence in their ability to find a new job.” Still, Yellen said continued low wage growth shows that the labor market is “not fully healed” despite unemployment approaching its long-run level.

“Higher wages raise costs for employers of costs, but they also boost the spending and confidence of consumers, and would signal a strengthening of the recovery that would ultimately be good for business,” she explained, adding “nationally there are at least some encouraging signs of a pick up so far this year.”

Economists say there are two main problems. Workers’ wages aren’t growing much, if at all. As a result, Americans aren’t going out and spending much. On top of that, many foreign economies are slowing down, which puts pressure on the American economy. Wall Street and the U.S. government will tell you the economy is doing well, but it won’t feel like it. In fact, according to a national survey, 70% of Americans believe the U.S. economy is permanently damaged, while 84% do not believe the economy has improved since the recession ended in 2009.

Texas

Texas has experienced a great run of economic strength when compared to the rest of the US and world. Texas metros were some of the first out of the recession. But many analysts, including myself, see a slower economy in the coming year. For starters, in March of this year the state ended its 53 month run of job creation, when for the first time it reported job losses on a monthly basis.

At the beginning of the year, the Dallas Federal Reserve warned that with oil prices falling 50% since July 2014, there would be a slowing factor regionally, while nationally oil prices would benefit the national economy as a whole.

Texas added a meager 1,200 jobs in April — better than the 25,200 job losses in March but still weak compared to the past five years, according to data released by the Texas Workforce Commission. Over the past 12 months, Texas has added 287,000 seasonally adjusted jobs. The state’s oil and gas industry lost 8,300 jobs in April, construction lost 5,400, and manufacturing lost 4,300 jobs. The state’s unemployment rate was unchanged at 4.2 percent in April, compared to a nationwide average of 5.4 percent. The job losses in construction and manufacturing this year are tied to the oil slump, causing less need for equipment and buildings. On the plus side, the leisure and hospitality industry gained 6,900 positions and the information services industry gained 3,400 jobs in April.

After a robust growth for the last couple of years, Texas employment slowed in January and February of this year with losses in March. To quote Mine Yucel, Senior Vice president of the Federal Reserve of Dallas, “headwinds for the Texas economy continue to be low oil prices, a strong dollar, and weaker growth in Europe and Asia. The Dallas Federal reserve expects regional employment growth between .5% to 1.5% in 2015 which would amount to 60,000 to 175,000 new jobs.”

Houston

Houston has seen the energy sector consolidate in response to the tightening of the global oil market. Drilling, engineering and service companies are reducing operating budgets and reducing staff by thousands. Not only will the energy sector feel this, but everything from automobile and home sales to shipping activity will be affected. The Houston metro area added an average of 9,000 net new jobs per month through 2014. In January 2015 we saw job losses of 3,700. February then saw a gain of 7,000 and then 4,400 were lost in March of this year. Projections are that Houston will see great job losses this year as the energy industry continues to consolidate.

What does 2015 hold for Houston? The explosive growth of the last few years will slow. Future layoffs within the energy sector will depend on oil prices. Presently wage growth, real estate, and personal income growth will ease through the remainder of the year and into 2016 based on current oil price of around $60/barrel.

Dallas / Ft Worth

Dallas and Fort Worth had strong job growth from last October through January of this year. Through 2014, the D/FW area was adding 11,000 jobs a month. However in January only 2,800 jobs were added to the area. March saw 10,200 lost jobs for the first time since November 2010. This loss was the largest monthly decline since 2009. From my view, one month of bad data does not make a trend. With current real estate development, corporate relocation and consolidation causing value increases north of D/FW in the Plano, Frisco, McKinney areas the remainder of the year should continue to be strong barring a catastrophic economic event. Companies looking for a midcontinent location are finding north Texas very attractive.

Major companies like State Farm, Toyota, Hisun Motors, and FedEx Office have made deals to relocate to the area. Additional companies are also considering the Metroplex as a new place to call home. Tax incentives, a low cost of living, and an abundance of prime building area holds quite an appeal. Raytheon, a major defense contractor already with a heavy North Texas presence, last year moved its Space and Airborne Systems national headquarters from California to the McKinney facility off U.S. Highway 380. Also last year, Emerson Process Management opened its new Regulator Technologies global headquarters at the Gateway site off U.S. Highway 75, where the Sheraton McKinney Hotel is set to open in February.

San Antonio

San Antonio’s real estate market has been buoyed by strong job and income growth. As in other metros within the Texas market, housing inventories are tight. The San Antonio area saw the highest quarterly year over year job growth (3.7%) in nearly a decade in the first quarter of this year.

It is too early to declare that the forces of supply and demand have established equilibrium in oil values, but if prices stay stable or better than $60/barrel then the local economy will find a comfort zone to continue exploration and drilling in the Eagle Ford shale fields.

As in the other markets, the local job market growth may slow slightly. Real estate sales and values will remain positive, but will grow at a slower pace.

Austin

Austin has been a great success story with over 162,000 new jobs since the end of the Great Recession that ended in June 2009. As a result the unemployment rate has declined to 3.3% unemployment, best among the large Texas metros. There has been an average of 27,000 jobs gained annually.

Fueled by strong job growth, the population and income growth in the area has outpaced the national average since 2009. Most of the jobs created (5,200) this last year came in the educational and health services industry, followed closely by trade, transportation and utilities (4,500). Like the other Texas metros, due to the slowing of the national economy, job growth should moderate through 2015 with strength gaining in 2016. Home sales will continue to improve, but at a slower pace.

After all this good news, (I’m joking) should the nation and the Texas region be concerned? Caution is warranted, but realize that over the past 30 years national GDP growth has averaged 1.9% in during the year’s first quarter, and 3.0% in the rest of the year. This suggests there is about a percentage point downward bias in the 1st quarter of every year. So, don’t fret about low first quarter growth – it takes much longer than a quarter to establish a trend.

Non-residential construction will be heavy this year in Texas. Home sales will slow, but be strong compared to the rest of the nation, depending on the impact of oil prices and the strength of healthcare, technology, and education growth in 2015. Obviously Houston, Midland, and a few smaller cities will be more vulnerable to oil values. Home values should continue to appreciate 4 to 8% due to lack of inventory for sale and for rent. Employment growth will be more like the rest of the US, with growth in the 2 to 3% range. This changes with the fortunes of the global oil market.

 

Texas housing markets (still) aren’t overvalued

The Austin Board of Realtors reported that the March 2015 median price for single family homes was $255,000, a 10% year-over-year increase. This is a record high for Austin homes, so it isn’t surprising that some are saying our market is overvalued or in a bubble.

Still, you can’t just look at appreciation and say the market is overvalued without looking at the reasons for the rise in prices. In relation to the other desirable cities that are creating 30,000+ jobs annually, our values are on the inexpensive side.

Texas has never led the nation in real estate appreciation. For the last forty years our state has averaged just under 4% annual according to Texas A&M Real Estate Center. Last year we saw 7.12% annual appreciation in Texas, according to FHFA House Price Index (HPI). During the housing bubble, Texas was at the bottom of real estate appreciation of all states, as you can see on this interactive map.

We’ve had a couple of good years in Texas after recovering faster than the rest of the nation. Speculation is hard in Texas, because the annual returns are not as great as in other markets. The speculation that many investors look for is not available in Texas; namely, those investors betting on appreciation rather than the fundamentals of income producing properties and/or historical sales prices. As long as job growth remains strong, Texas’s housing market likely won’t tank. Folks betting on appreciation might get hurt, but others will be fine.

It’s all about jobs

Again, job creation is driving demand and home values. From March 2014 to March 2015, Texas total nonfarm employment increased by 327,500 jobs, or 2.8%. The Texas unemployment rate was 4.2% for March 2015, down from 5.3% in March 2014. The Texas unemployment rate has been at or below the national rate for 99 consecutive months. Over the same period, Dallas had 4% job growth, ranking 5th nationally. The other major Texas metros missed the top 10: San Antonio grew by 3.4% (14th), Houston grew by 2.9% (22nd), Fort Worth grew by 2.6% (28th), and Austin by 2.5% (29th).

Whether the stronger home price appreciation in some Texas markets will lead to a bubble will depend on whether the employment growth here is sustainable in the long term. Most analysts think so. A continued drop in oil prices, or even a tech bubble burst, could curb demand for housing in hot Texas markets, and take some of the air out of the steady increase in values. Texas was among the first states to emerge from the 2007-09 Great Recession, surpassing its pre-recession employment peak in late 2011. Since 2000, change in Texas employment is up 24.9%, while the rest of the country is up 4.7%. Since 2000, Texas has created 2 million jobs, while the rest of the country combined has produced 5 million. As a whole, 29% of all new jobs since 2000 were created in Texas.

Remember the financial meltdown in the US was caused in part by not following the fundamentals of real estate. For every three jobs there should be one home start. Texas and its metros continue to be right in line with that. Those states where appreciation was in the mid 40% annually were pure speculation. It was a strong run, but based on non-sustainable fundamentals. Texas continues to have the fundamentals in building and consuming the shelter available presently.

Richard W. Fisher, president of the Federal Reserve Bank of Dallas, emphasizes Texas’s comparatively rapid rate of job creation. Over the last twenty-three years, the number of jobs has increased twice as fast in Texas as it has in the rest of the country. Many people might imagine that most of those new jobs pay low wages, but that turns out not to be true. To be sure, Texas has more minimum-wage jobs than any other state, and only Mississippi exceeds it with the most minimum-wage workers per capita. However if you consider cost of living, the Texas wages are better than most.

According to the Dallas Fed, only 28 percent of the jobs created in or relocated to Texas since 2001 pay in the lowest quarter of the nation’s wage distribution. By comparison, jobs paying in the top half account for about 45 percent of the new jobs in Texas.

This means that Texas has been creating or attracting middle and high wage jobs at a far faster pace than the rest of the country taken as whole. For example, between 2001 and 2012, the number of Texas jobs in the upper-middle quarter of the nation’s wage distribution increased by 25.6 percent. This compares with a 4.1 percent decline in the number of such jobs outside of Texas. Though coming off a comparatively small base, Texas has also outperformed the rest of the country in its growth of high-paying jobs.

That’s a big deal. During the last decade, the country as a whole experienced zero net job creation, and the decline in middle-class jobs is arguably the largest single threat to the national economy’s viability. Only 65 counties out of just over 3,000 have fully recovered real estate values, employment, and GDP to prerecession numbers. Nationally the country continues to struggle. Much of these statistics come from an article from the Federal Reserve Bank of Dallas, 1Q14.

voice graph

Appreciation isn’t the only factor in determining if a market is overvalued. Here are some other metrics to watch:

  • Job creation vs. home starts (a ratio of three jobs to one home start is balanced)
  • Resale housing inventory: less than six months is considered a sellers’ market
  • Less than 24 months supply of new home starts
  • Less than 24 months supply of lot inventory
  • Rental occupancy residentially above 90% with no concessions
  • Double digit appreciation for more than three years

When there has been job creation but an absence of developing and building there will be a need for more inventory as the market plays catch up. That is where our Texas metros are; playing catch up, not overvalued or undervalued. With true demand from population and employment growth the metro markets have a ways to go to catch up.

Those of us who have been watching and analyzing Texas real estate will be the first to tell you that we don’t know the future. History has taught us differently. Even if Texas metros are a good market now doesn’t mean in 18 months or 5 years that it still will be a good market. But by reviewing past regional history against national metrics, we can say confidently that the regional market will be strong for at least the next three years based on jobs, population, affordability, and demographics.

The speculative building that we saw regionally in the 80’s here in Texas and the same in the sand states (California, Nevada, Arizona and Florida) in the early 2000’s is not present today. Double digit appreciation as a region is not present. Are these things that bear watching? Absolutely. Remember that although the headline of “x market is overvalued” gets attention, to most long term analysts and economists appreciation is just one of many statistics, and all the fundamentals need to be reviewed to make a true assessment.

 

Expect low inventory to persist

One of the most common concerns for those moving to Texas is the lack of inventory in all real estate channels. Strong demand is the main reason there has been little to no increase in inventory in the last few years. There has been a great deal of discussion regarding the consistently low housing inventory levels throughout the nation, not just in Texas. Very little, however, has been written about the reasons why inventory levels are staying so low.

Understanding the “whys” can be helpful in predicting how these factors might influence longer-term supply levels and future appreciation potential. This knowledge might also shed light on why inventory might remain constrained over the long term in our region.

In the second half of 2011 we began to see an acceleration in the decline of inventory levels nationally and in our Texas metros, as Texas began recovery sooner than the rest of the country. Since that time housing inventory has remained historically low. There are numerous conditions that have contributed to this, and bundled together have created an inventory supply dynamic that, as prices rise, only serves to limit the number of homes available for sale.

Home prices are rising, even hitting record levels in most of our Texas metros. Even with the rise in values, Texas is not an overvalued market, due to demand and the lower annual appreciation we have experienced historically. These numbers come from the Federal Housing Finance Agency. Home prices in Texas increased in 33 of the past 38 years.

  • The highest rate of appreciation was 17.8 percent in 1981, which is extremely high for Texas.
  • House prices increased by more than 10 percent in five of those years
  • Texas home prices declined in six of the past 38 years.
  • Four years of decline occurred in the 1980s when the oil market collapsed.
  • Two years of decline were during the Great Recession in 2009 and 2010.
  • The largest decline was in 1987, when prices fell 9.6 percent.
  • The average rate of house price appreciation over the past 38 years has only been about 4 percent.

Gains of around 5 percent are seen as stable, sustainable growth. Those states that have averaged over double digit appreciation (California, Nevada, etc.) have shown that that type of hyper appreciation is not sustainable. Our market is not built on speculation, but rather true demand and employment growth. I get nervous anytime I see double digit appreciation over a couple of years.

Most of our regional metros have less than three months supply (a six month supply is considered equilibrium, with supply and demand balanced). Based on current economic factors, regionally we will continue to see a sellers’ market for 3 or 4 years while the markets play catch up. Employment growth also plays into this with the number of people moving to the Texas region looking for jobs and lower cost of living.

Mortgage rates are still low for now. At less than 3.7 percent, mortgage rates haven’t been this low since 2013. Even though rates are expected to rise as the year progresses, for now these rates are at very low levels. The average over the last 50 years has been 8.8%. With the economy improving, the potential of higher interest rates this fall is great.

Most Baby Boomers, especially older boomers born before 1955, own their own home. They’ve been paying a mortgage, faithfully and relentlessly, for most of their adult lives. For these people, a primary goal is to finally pay off the mortgage and own their home free and clear. For many, paying off the mortgage is an important threshold – a crucial step they feel they need to take before they can even consider retirement.

For many Boomers, the equity they’ve built up in their home is the largest asset they have. According to a recent FNMA survey of 6,000 adults, on average, home equity among homeowners age 65 and older is more than $200,000. Many boomers look forward to freeing up some of their equity to pay for travel, medical expenses, home renovations or other expenses they know they’ll face at some point in the years ahead. Many think of moving down but are unsure of the ability to afford something else or the ability to match the great mortgage rates they have had access to. There isn’t a great deal of motivation for them to move at this point.

Prior to May 7, 1997, the only way you could avoid paying taxes on your home sale gain was to use the funds to buy another, equal or more expensive house within two years. I recall my parents being motivated by a “move up” mentality. Every few years, they would sell our existing home for a bigger, more expensive property. They would explain to us that they were using tax-free money to leverage into a bigger home that only “someday” they would owe capital gains on, and hopefully something they would not have to deal with, but their heirs. By leveraging those gains, they contributed to the health of the local real estate market. This dynamic created a steady supply and demand equilibrium not only in local markets, but in markets throughout the country.

When they turned 55, another option became available. They could take a once-in-a-lifetime tax exemption of up to $125,000 in capital gains. However, when the Taxpayer Relief Act of 1997 became law, the rollover or once-in-a-lifetime options were replaced with the current per-sale exclusion amounts. The Taxpayer Relief Act allows homeowners to take a $250,000 (for singles) or a $500,000 (for married couples) capital gains/appreciation exclusion, which could be used under certain conditions every two years. While the Taxpayer Relief Act eased the home-sale tax burden for millions of homeowners, higher-priced real estate markets experienced an unintended outcome: fewer move-up buyers because their gains on their existing home exceeded the $250K/$500K maximum, thereby creating an unwanted tax expense associated with moving.

This frozen segment of the real estate pipeline has upset the flow of buying and selling activity. The typical move-up buyer has caused a bottleneck by remaining in place thereby reducing available supply to new entrants. The current law does not create the compelling motivation for individuals to continually move up into “bigger and better” higher-priced properties.

In Texas our average values have continued to improve as the rest of the country deteriorated. Our average price in Texas currently according to Texas A&M Real Estate Center is $238,500. In many of our metros, it is not uncommon for homeowners to exceed the $250K/$500K exclusion amounts if they have owned their primary residence for a period of time. Once a homeowner passes this threshold, their motivation to sell in order to move up diminishes as the possibility of a financial tax consequence looms. Many move up buyers have begun their research only to discover they would be subject to capital gains tax on a portion of their gain — another sacrifice they are not willing to make in order to buy that bigger, better property.

Additionally, there is the current mentality among some homeowners that home values will continue to rise. Very similar to the mindset of people holding on to a stock because they expect it to rise, people believe their properties will increase over time. Right or wrong, this mindset has become another factor in the tightening of inventory. What typically happens is that once homeowners realize the up cycle has turned, they electively decide or are forced to sell due to job loss or other negative economic pressures. This would result in a significant inventory increase, which we have not seen in this region. Based on current employment growth projections for the region, values should continue to appreciate.

Those wanting to move find that values have continued to appreciate beyond their means. Consumers do not expect values and demand to be as strong as they are in this region. The shock of values after the recession in this regional market have caused many sellers to pull back and hunker down. The aforementioned forces feed on each other and further exacerbate the move up problem. Lower inventory begets lower inventory; a downward pressure cycle continues. If one cannot find properties to move up to, they will not sell their current homes.

This same dilemma plagues retirees finding limited or no options for retirement communities in their local area. Retirees in this region have had little to nothing to chose from. Texas was not historically a retirement state. In the last few years, the low cost of living, sunny weather, and low tax burden have captured the national retirement developers’ eye, but it will take some time for the development cycle to catch up. Because of this, housing supply is limited on the top end of the market since seniors are not motivated to sell unless they know exactly where they are going.

Over the past seven years there has been an unparalleled low level of new housing starts and development. Equity and lenders were recovering from the recession and housing bubble. No one was interested or positioned to start new developments. This prolonged decrease in new home development dramatically multiplied the low-inventory gap. To further the dilemma, the start-to-finish build cycle in many areas has become more cumbersome due to new restrictions, labor, administration, and costs, often requiring multiple years to plan, approve, build and market, which slows market momentum. Until the new housing development engine gets moving at an accelerated pace, inventory will continue to lag.

Be aware that these major factors have created this extraordinary low-inventory environment we are currently experiencing. Given the factors above, inventory will remain low for an extended period of time.

Texas continues to outpace the national economy

Officially, the Great Recession reached its lowest point in June of 2009, and the national economy began its path to recovery. Almost six years later, some states like North Dakota and Texas with strong energy industries are home to the most fully recovered economies in the aftermath of the Great Recession.

However, if we look at the majority of the country, unemployment has not recovered in 95% of the near 3,100 county economies to pre-recession levels according to a new study by the National Association of Counties.

A county-by-county breakdown of local economic performance was issued in the association’s 2014 County Economic Tracker. The study spans all 3,069 U.S. counties and suggests the majority of local economies have not fully returned to pre-recession stability. The association’s report, based on data obtained from Moody’s Investors Service, breaks down local economic performance into four major categories: gross domestic product, employment totals, unemployment rates, and home pricing. The findings for 2014 were compared to pre-recession figures to get a feel for which local economies have recovered best since the Great Recession.

This analysis of county economic conditions identifies patterns of growth and recovery in 2014 across the 3,069 county economies by examining annual changes in jobs, unemployment rates, economic output (GDP), and median home prices. In addition, it explores 2013 wage dynamics by adjusting average annual pay in county economies for the local cost-of-living and inflation. The overall analysis reveals that:

• 2014 was a year of recovery, but unemployment has yet to return to pre-recession lows in most county economies.

• Job growth accelerated in 2014, economic output expansion and county housing markets stabilized across the country, yet most have not fully recovered.

• Economic recovery is starting to spread, although only 65 county economies have fully recovered.

• 2014 recorded higher net job creation than the previous year, with 40 percent of the new jobs in industries earning more than the average county pay.

• On the positive side, we find out that 72 percent of county economies recovered on at least one of the indicators we analyzed.

 

newsletter 3-26

 

In Texas, the recession is in the rearview mirror. Economic growth across the major Texas metros has been impressive since the recession and they have fueled the state’s job growth. However with crude oil values down 52% in February from year ago levels, Texas employment growth will moderate in 2015, affecting the Texas’s metros in varying degrees.

The Houston economy has grown over 310% since the recession, Dallas / Ft. Worth 228%, and Austin 114%. Houston has experienced the greatest benefit from the energy sector and its rise after the recession. D/FW lagged behind the other Texas metros after the downturn, however of all the Texas metros it will probably have the strongest growth and continue to propel the state’s growth after the oil decline going into 2015.

The recession’s impact was not as severe in Texas. Also realize that this last recession was the worst since the Great Depression as shown by this great chart from Calculated Risk.

newsletter 3-261

To say that this last recession significantly affected job growth is an understatement as the chart shows. From peak to trough, the Texas region fell 4%, compared to the national decline of 6%.
So what is causing the national economy to lag? First we need to understand what made previous booms and recessions. Realize that the economic contraction in 2008 was nothing like past recessions. Inflation and monetary tightening had nothing to do with the recession: core CPI peaked at just 2.5%. It was, instead, a financial crisis, comparable in recent US history only to the Great Depression.

During the course of 2007 and 2008 recession, US household wealth fell by 25%, equal to about $15 trillion dollars. To put that number in perspective, annual GDP in the US in 2008 was $14.8 trillion. Nothing close to this had happened in the prior 75 years. In fact, the annual change in household wealth had never been negative.

When wealth falls, consumption falls. Remember we are a consumer driven economy, where the majority of our GDP is driven by the consumer’s ability to acquire debt and spend it. Consumer sales in the US were negative year over year for six consecutive quarters during 2008-09. In comparison, consumer sales actually grew 1% during the trough of the 2000-02 recession.

The Texas region suffered, but not near like other states, particularly California, Nevada, Arizona, and Florida, where speculative appreciation was strong and the base of the consumer economy was home equity. This collapse of wealth in so many other states had little to no effect in Texas due to the lack of speculation and various regional banking laws.

In the wake of the dot-com bubble, the housing market inflated like never before. This was completely unlike prior economic cycles. Some states experienced not only double digit appreciation, but high double digit appreciation (40-50% annually). Additional speculative housing supply created a demand vacuum when this bubble burst. A major engine for the economy was damaged, the tail effects of which are still being felt. New and resale home sales are just beginning to recover from the lowest level experienced in many years.

During this real estate and financial boom, a byproduct was an increase in household debt. This leverage was in large part underwritten by inflating asset prices and ease of loan qualifications. When those prices collapsed, so did the ability to fund debt. The economic expansions in the prior 30 years were fueled by leverage. The current recovery has not had anything like that to propel faster growth. Leverage is lower now than it was 30 years ago. Without the leverage from previous recessions, the economic recovery is based on truer means; supply and demand.

Because of the increase in “equity wealth”, consumption exploded. Therefore with the collapse in housing and consumption came a collapse in employment two to three times more severe than prior recessions in the post-war era. This becomes a vicious cycle: lower demand leads to lower employment, leading to even lower demand. The dynamic is not unique to the current recovery but the damage inflicted in 2008 was orders of magnitude more severe.

Texas did not have the speculative housing economy as seen in other states. Therefore we did no have very far to drop when the national bubble burst. The Texas economy slowed in 2008-09, but showed relatively little real estate depreciation. Because of the nationalization of so much lending, development slowed or stopped. Yet in Texas we continued to see good employment growth across all sectors, not just energy. This employment growth drove ‘true demand’ as housing supplies dwindled across our state. In 2015, most metros continue to see a sellers market as demand outstrips supply in almost all Texas metros, cities, and towns.

Texas should continue to see growth. In the short term, continued growth is dependant on how severe the oil downturn is on our lending institutions. Presently, the Dallas Federal Reserve shows little impact on regional growth. The sweet spot for the economy is between $55 and $90/barrel. Below $55/barrel hurts energy employment in this state. Above $90/barrel starts to put a strain on household budgets.

Texas continues to be the ‘land of opportunity’ that California used to be. With lending rates low, supply low, and demand great, there is not a better opportunity to buy and see long term appreciation than in Texas real estate. Remember, I am coming from over 35+ years of watching, engaging and analyzing this regional market. No one I am aware of has called me optimistic. Compared to over 3000 counties nationwide, Texas counties seem to be faring better than most.

Economic outlook positive for 2015

The strength of the Lone Star State’s economy has led our national economy through the general gloom of the slowest national economic recovery in modern history. Now, with the price of West Texas Intermediate (WTI) crude oil hovering around $45/barrel, and unleaded gasoline selling for as little as $1.89 a gallon, some worry that the energy dependent Texas economy will lapse into recession. Texas has diversified its economy significantly in the last twenty years, but energy is still king. So when oil prices plunge, it has a ripple effect on the state’s economy.

Texas is America’s second most populous state and the world’s 14th largest economy with a GPD of about $1.5 trillion, representing about one tenth of our national output. Since 2009, the Texas GDP has grown 4.4% per year, about twice the national average. In the same time, Texas has been creating approximately one out of every fou new jobs in the nation. A lot of this energy growth is because of the development of fracking to a level where Texas produces more than one-third of the nation’s oil and has seen its oil production double in three years.

This past year, Texas outpaced U.S. economic growth and led the nation in job growth, setting a state record with 421,900 jobs added for the 12 months through October. In 2015, economists expect Texas’s economic and job growth to slow slightly because of lower oil prices, labor shortages in certain industries, and weaker exports. The Federal Reserve Bank of Dallas expects the Texas economy to grow 3.5% in 2015, down from an estimated 4.5% this year. It expects the state’s employment growth to be 2.5 to 3% percent in 2015 vs. 3.5% in 2014.

With the fall in oil prices, which have plunged nearly 47 percent since last June, there have been concerns about the health of the Texas economy. Texas oil production, which has more than doubled in the last three years, drives much of the state’s economic growth — about 12 percent. And while energy accounts for less than 3 percent of Texas employment, energy employment jumped 11 percent for the 12 months through October, more than any other industry.

Lower oil prices can be a double-edged sword for the economy. A price drop generally benefits the U.S. economy: consumers save money on gas and home heating bills, consumer spending rises, and some businesses benefit from lower transportation and shipping costs. But capital investments could suffer, causing a trickle-down effect on other businesses.

Falling crude oil prices will cost Texas 50,000 to 125,000 jobs by the end of 2015, according to the Dallas Fed. Texas produces 36% of the crude oil in the United States, so Texas will be harder hit than other states. The states of North Dakota, Oklahoma and Louisiana also would be hit hard.

In Texas, it’s unlikely that low oil prices will cause a crisis as they did in the late 1980s, because the state’s economy has diversified so much since then. Still, some fear that a prolonged downturn will hurt energy companies and could spread to other businesses such as real estate, restaurants, and retail that have benefited from the increased energy hiring.

The big question is what oil prices will do in 2015. Oil prices are unsustainably low right now – many high-cost oil producers and oil-producing regions are currently operating in the red. That may work in the short-term, but over the medium and long-term, companies will be forced out of the market, precipitating a price rise. The big question is when they will rise, and by how much.

In the waning days of 2014, the U.S. consumed gasoline at the highest daily rate since 2007. Low prices could spark higher demand, which in turn could send oil prices back up. That said, our large metros have seen little slowdown in demand. Businesses are still cautious, but trying to keep up with demand. Low unemployment and improving wages in Texas are a great example of this. Texas has a broad based economy, but the potential loss of 125,000 jobs this year will have a dampening effect on the regional economy.

For those of us of a certain vintage (Baby Boomers), these are not numbers to brag about. Most of us of that vintage remember the boom and bust cycles of the energy industry. The oil depression era of the late 80’s and early 90’s still brings painful memories when oil brought many industries to their knees and buried one arm of the financial industry. The damage in Texas was immense. In those years, more than 700 banks failed, the savings and loan industry went away, nine out of the top ten national builders went away, and most real estate was worth ten cents on the dollar. In Houston alone there was over 88 million square feet of speculative office space and 400,000+ new homes sitting. The result was economically catastrophic in the region with widespread joblessness, empty buildings of all types, and life changing events for many families.

The Texas economic engine is likely to move at a slower speed in 2015, even as the U.S. economy picks up steam. But it still will be one of the leading states for job formation. Why?

First, Texas today has a high level of intellectual capital. The state’s strong annual employment growth over the last few years is because of the jobs added to professional categories, from architects to technology, from banking to health. Whether it is the numerous startups that become global in Austin, or the undisputed capital of energy Houston, the expertise founded here has worldwide economic effects.

Because of that, Texas currently gains more out-of-state residents than any other state and is a leader in home sales from international buyers. National census reports showed that that more than 584,000 people moved to Texas from out of state in 2013. This is more than any other state. This has lead to growth driven by strong demand for Texas real estate, not speculation. The demand is being driven by the thousands of people who move to the Lone Star State for new jobs or the opportunity to start a business. Job growth in almost all economic channels is apparent, even with the slowing of oil hiring.

Secondly, Texas continues to be one of the top states in median household income growth and new home sales, with the median household income of Texas homebuyers increasing 5.9% year-over-year to $97,500, the 2015 Texas Homebuyers and Sellers Report said. This is more than four times the increase in median household income among homebuyers nationally, which rose 1.4% to $84,500 during the same time frame. Additionally, 28% of Texas homes purchased between July 2013 and June 2014 were new homes, a 1% decrease from the previous time period, yet still nearly double the share of new homes among U.S. home sales during the same time period. Nationally, the share of new home sales remained constant at 16% of all U.S. home purchases

Thirdly, Texas banks and their bankers burned by the freewheeling days of the 80’s are downright conservative and state lending rules reflect those concerns. Home equity as well as development loans are considered harsher in the Texas lending environment than most states.

Texas still struggles in some areas due to increased restrictions in lending standards and rising home prices in certain local markets, which stifles the growth of first-time homebuyers in Texas. The percentage of first-time homebuyers in Texas decreased 4% to 29% of all Texas homebuyers between July 2013 and June 2014. Nationally, the percentage of first-time homebuyers decreased 5% to 33% of all U.S. homebuyers during the same time frame.

Lastly, Texas would be a strong economic leader even without energy. The state continues to thrive because it keeps a tight rein on the size of government, emphasizing smart regulation with a minimum of red tape. This is why so many companies like Occidental, Toyota, and Exxon have located in Texas. Low taxes and cost of living are a welcome relief to the costs of other strong job creation states.
Sure, the world price of oil effects Texas. That is why so many of us follow daily the cost of WTI barrel. But everything else considered, the business friendly public policies and job creation should continue to allow 2015-16 to be great years for our Texas economy.

The shape of residential real estate to come

Demographic trends are among the strongest forces that shape real estate markets. Different generations have different housing needs. The largest and wealthiest generation, the Baby Boomers, is reaching retirement age, which will have a profound effect on the national economy and the supply of available housing.

Let’s take a look at the major generational cohorts, examine their real estate needs, and discuss what can be done to meet those needs.

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Greatest Generation

Anyone born before 1946, now age 70 or older. Their housing needs are mostly satisfied with current housing, which they typically own. They currently are not considered in the buyer’s side of the equation. The only real estate they may purchase in all likelihood is a burial plot or move into a retirement center. Most currently are living in inventory that will come to the market in the next ten years.

Baby Boomers

Anyone born between WWII and the Vietnam War, the years of 1946 through 1964, now age 50 to 69 presently. This generation began when the Greatest Generation got home from the war and started families. Much of today’s housing stock was built with this generation in mind. Many are on their 5th to 20th home purchase. Many in this generation are interested in moving down without sacrificing the amenities of their current lifestyle. The larger homes they vacate will be “move up” inventory for future generations who want to move into their established neighborhoods.

Generation X

This generation’s timeframe is from 1965 to 1984, now aged 30 to 50. As you notice in the chart, their population is not as great as the Baby Boomers. This means that the US resale housing stock has more than enough homes designed for move-up buyers.

This group also had the unfortunate timing of reaching the prime age of home buying just as the recession hit. Their ability to get economic traction has been challenged due to high unemployment, lack of wage increases, and the loss of over $7.5 trillion in equity as the housing bubble burst.

Their inability to ”move up” as fast means there is more move up inventory than potential buyers. This has not seemed to affect values presently, but could in the future.

Generation Y

Also known as “Millennials”, this generation was born between 1982 through 2004. Like Generation X they have not been able to get economic traction for home buying. And due to the financial meltdown and recession, many have delayed moving out from their parents, having children, or getting married. The social pressure to start families is not as great as in previous generations. Their decision to delay home buying affects the previous generations, as they have fewer eligible buyers to sell to.

Post-Millennial

This is the next generation, kids that have been born in the last 10 years which currently lack a catchy generation name.

The youngest generations have a need for more entry level housing. First time home buyers are way under supplied in today’s market. Those born in the 1980s (currently 26—35) have delayed buying a home, creating pent-up demand.

I define “entry level” housing as a newly constructed home priced below $200,000, usually on the outskirts of urban development where land is cheaper. This historically has been 35+% of the home buying market. Currently if we look at our inventory in Texas and the nation it is less than 7% of the total market.

The ability to address this market is near impossible, due to the cost of land, materials and labor. Principally, land costs and development are too expensive to justify building a modest home. Additionally, labor and materials continue to escalate 15 to 22% annually with greater demand nationally.

With the cost of land and infrastructure it is hard to deliver a 50’ front production lot (minimum allowed size in most communities) for less than $40,000 in most metros and their suburbs. That $40,000 lot equates to a minimum of $200,000 home in most Texas metros. Builders also downsized during the recession, and they don’t have the same capacity to build in volume that they once had.

Today, if you’re building a $400,000 house, you’re going to make more money than if you were building a $200,000 or $300,000 house. All of this leads to sticker shock for consumers who look at entry or move up in new homes. Resales begin to look more attractive due to location or price difference.
So what are the needs of the future housing market?

More entry level product

The obvious need is entry level housing, $200,000 to $250,000 and below. Municipalities need look at allowing smaller lot sizes and subdivision of existing lots, allowing higher density and greater supply. Affordability cannot be legislated or regulated by a municipality, but smart regulation should encourage abundant housing, which makes housing more affordable for all.

Creating this entry level opportunity helps new families build equity and become home buyers. Many of us in the Boomer generation bought and sold those entry level homes with enough equity to move up and continued that path to our current homes. By addressing this market we assure the older generations built in buyers and help new families build equity.

“Move up” ($300k – $1mil) inventory is abundant

The sellers in this category need to realize that there is a lot of competition at these price points. Their ability to sell for the price they want is predicated on how much inventory there is at their price point and location. If a home in this category is on the market for over 90 days, pricing and demand are likely the culprits. This is still a sellers’ market, but there is a dwindling number of buyers for this category. Sellers need to expect a bit more negotiation at these price points. Builders need to realize that there is much more competition in this price point.

There is a need for more active adult / move down inventory

Boomers want to move down as they become ‘empty nesters’. Not many builders other than Del Webb build for them. Builders need to look at that market and understand it better. Most ‘move down’ clients do not want to live farther out in the suburbs. They do want a higher level of amenities in their home. Most are fearful of putting their homes on the market and having it sell before they have found something else. Lenders / builders need to bridge that financing gap, allowing the ‘move down’ client to purchase before getting their equity from their present home.

Home building is still depressed

As a nation we are still over 50% short on home starts and sales. There has been an average of 832,000 home starts per year in the last five years, with a US population of 312 million. Compare this to the next lowest production of 1,398,000 units per year in the 1950s, when the population was around 175 million. That’s 40% less units for 78% more population! The point is the market is still gaining traction. Consumer confidence is up, but uncertainty and doubt are at the back of many consumers’ minds when selling or purchasing a home.

Multifamily boom

The last time we saw apartment and multifamily building of this magnitude was in the 60s and 70s when the Boomers were reaching young adulthood. 350-600k units per year was the norm and multifamily was 25-30% of all production. We have not seen production near that level until the last few years.
With near record numbers of apartments built the last few years in Texas metros, expect rent concessions. As strong as rent escalation has been in this state it should slow in 2015-16. Even though the actual number of residences created has increased each year, the housing mix continues to tilt away from single family to multifamily. Expect higher density product to continue gaining traction on single family.

What this means is that builders and sellers need to review their market strategy carefully. Realize where the bulk of buyers are. Although it is a sellers’ market, that is all predicated on demand and inventory in each price channel.

All of us will have to work harder to understand the market needs and make adjustments. The good news is that if you live in Texas, and these problems present themselves because of high demand and continued employment growth. We all just need to be aware of the demographic trends that will shape our industry.

CFPB brings changes to mortgage lending

The Consumer Financial Protection Bureau (CFPB) was created in 2010 in direct response to the financial crisis of 2008. As many remember, the crisis was set off by a number of problems in the subprime mortgage market, and the downstream selling of those mortgages in security markets. This reform process has been compared to the sweeping financial reforms of the 1930s that followed the Great Depression, which created the bulk of America’s financial regulation as we know it today.

While the idea of a federal office specifically dedicated to consumer finance has been kicked around by policymakers for decades, experience with questionable subprime mortgage loans in the nineties and then through the housing bubble during the early years of the 21st century brought the idea back to the front of public debate.

The CFPB’s objective is straightforward: To create access for all types of consumers to financial markets, products, and services that are fair, transparent, and competitive. The following are the stated goals of the CFPB, per their website:

1) Ensuring that consumers have timely and understandable information.
2) Prohibiting unfair, deceptive, abusive, or discriminatory business practices.
3) Identifying and addressing outdated or burdensome regulations.
4) Promoting transparent, efficient, and competitive markets for consumer financial products. That includes not only credit, mortgage and banking, but any predatory lending.

Background

Nationally, home prices nearly doubled between 2000 and 2006, vastly greater than the historical appreciation rate that roughly followed the rate of inflation. For residential properties (particularly in California, Nevada, Arizona, and Florida) annual appreciation was in excess of 35%, while the rest of the country had a much lower appreciation. Here in Texas we saw 2-3% annual appreciation as a state (50th in appreciation).

Residential homes had not traditionally been treated as investments subject to speculation, but this changed during the housing boom. Homes were being purchased while under construction, then being flipped for profit without the seller ever having lived in them. Some mortgage companies identified risks inherent in this activity as early as 2005, after identifying investors assuming highly leveraged positions in multiple properties.

Speculative borrowing in residential real estate has been cited as a contributing factor to the subprime mortgage crisis. During 2006, it is estimated 22% of all homes purchased (1.65 million units) were for investment purposes, with an additional 14% (1.07 million units) purchased as vacation homes. During 2005, these figures were 28% and 12%, respectively. In other words, a record level of nearly 40% of homes purchased was not intended as primary residences. David Lereah, National Association of Realtors chief economist at the time, stated that the 2006 decline in investment buying was expected: “Speculators left the market in 2006, which caused investment sales to fall much faster than the primary market.”

Many loans were made to consumers who did not understand the consequences of borrowing 120% of their equity in their properties on a frequent basis, in some cases as often as every 90 days. The belief was that real estate would continue to appreciate dramatically in value, therefore covering the basis of making the loan. Other offerings were stated income loans with little to no verification of the stated income. In later years these would be referred to as ‘liar loans’. Additionally, zero-down and loans became common, allowing buyers to purchase a home with no down payment or equity in play.

Looking back, risky loans were based on a faith that home prices would increase to infinity. Other investments do not allow the leverage that real estate allowed at the time. Many companies did not change the underwriting treatment of a home (which was traditionally a conservative inflation hedge) to a full scale speculative investment. American Nobel Laureate, economist, academic, and best-selling author Robert Shiller argued that speculative bubbles are fueled by “contagious optimism, seemingly impervious to facts, that often takes hold when prices are rising. Bubbles are primarily social phenomena; until we understand and address the psychology that fuels them, they’re going to keep forming.” Another noted wise investor, Warren Buffett, testified to the Financial Crisis Inquiry Commission: “There was the greatest bubble I’ve ever seen in my life…The entire American public eventually was caught up in a belief that housing prices could not fall dramatically.”

Why the history lesson? Looking back, there were a small percentage of predatory lenders that took advantage of prospective home buyers by writing loans that were destined to fail when the home bubble burst and the market inevitably corrected itself. Ultimately, many of these predatory loans failed when the market crashed and many borrowers found themselves underwater.

Sure enough, after several years of these aggressive – and in some cases, fraudulent – lending practices, homeowners began to default on their loans at an alarming pace. To make matters worse, many longstanding corporate entities (like the insurance giant AIG) had made aggressive positions on these mortgages.

As the subprime market crashed, many companies like AIG and Lehman Brothers that were on the wrong side of the speculation got in deeper and deeper trouble and eventually many failed or had to be bailed out by the federal government. The stock market crash (in which the Dow Jones Industrial Average lost almost half its value) also decimated many Americans retirement accounts. It is estimated over $7.5 trillion in equity was lost nationally. The country and most of the world has still not recovered. Nationally only 65 counties out of nearly 3,100 have fully recovered in home values and employment.

Implications

With the fallout from the financial crisis fresh in the minds of lawmakers and newly elected administration, the CFPB was created in 2008 to be a “watchdog” for consumers against the potential predatory actions of financial companies. Following is a list of some of the reforms instituted by the CFPB:

Ability-to-Repay/Qualified Mortgage

Until recently, lenders were allowed to direct borrowers toward high-interest loans, which are more profitable for lenders, even if they qualified for a lower-cost mortgage—a practice that helped lead to the financial crisis. In early 2013, the CFPB issued a rule that effectively ends this conflict of interest.

Integrated Disclosures

Integrated disclosures should make the lending process easier for consumers to understand. The CFPB has set August 1, 2015 as the effective date for the new Loan Estimate and Closing Disclosure forms that will (almost) replace the Good Faith Estimate, Truth-in-Lending, and HUD-1 disclosures used today. Reverse mortgages and certain home equity transactions will continue to use the current disclosure, which could create some confusion on those rare 80/10/10 transactions.

Perhaps the biggest change is the new “three day rule,” which requires that the borrower receive the Closing Disclosure form three full business days prior to consummation. Lenders and settlement agents are already beginning to work out the details about how this new form will be produced and delivered. All real estate professionals will require training on the new forms in order to help guide their buyers and sellers. In addition, the consumer gets a low-cost home loan counselor. In January 2013, the CFPB required the vast majority of mortgage lenders to provide applicants with a list of free or low-cost housing counselors who can assist buyers in making smart lending choices.

Quality Service Providers (such as Independence title and others)

While Realtors and the industry are dealing with new borrower qualifying requirements, and will be dealing with new disclosures next year, CFPB and other regulators have been putting increasing pressure on all lenders and parties involved to ensure that their third-party service providers meet very high standards. This, in turn, has caused lenders to put title and settlement providers under a microscope as they routinely handle vast sums of lender funds and considerable amounts of consumers’ personal information. Expect lenders to be spending more time on their approved settlement provider lists as the “flight to quality” continues to accelerate.

Affiliated Business Arrangements

 

Most of us go to a real estate professional and take direction on where we should get our financing, title work, etc from. This is what many in the industry call ‘captured business’. The CFPB is taking a hard look at the operational and financial aspects of these arrangements. Is it a ‘kickback’ or financial gain for the referred business? CFPB has taken over enforcement of RESPA from HUD and they are serious about making sure ABA’s are operating under both the spirit and letter of the law. Recent enforcement actions demonstrate the Bureau’s intention to ensure that consumers are aware of these arrangements and understand their options for mortgage and title and settlement services. Brokers with mortgage and or title ABA’s should pay special attention to compliance in the new era.

There is much more than anyone can cover in one blog posting. But suffice to say, you as a consumer or real estate professional need to understand the implications of the new agency. If you have a question, ask. If your realtor, lender, title company, etc. cannot answer you probably need to continue to look and find an appropriate representative that can.

I would suggest that you look at lenders, builders, and title companies that are equipped to comply with the parameters put in place by the CFPB. Should you have further questions, Independence Title has a wealth of resources. Contact our Education Team and study the resources posted on our blog:

http://independencetitle.com/cfpb-what-it-is-and-why-we-care/

http://independencetitle.com/new-standards-for-mortgage-lending/

http://independencetitle.com/new-consumer-finance-protection-bureau-regulations

http://independencetitle.com/cfpb-chat/

Low oil prices and the national economy

In our last edition of the Voice, we discussed the potential effects of the decline in oil prices on the Texas region. The fall in energy prices has the potential to cost the Texas economy 125,000 to 150,000 jobs. This week, we’ll look how declining oil prices could affect the national economy.

Most of us are saving $20 to $30 dollars per tank, which means consumers have more money to spend elsewhere. In addition, most of the country north of Texas depends on heating oil or natural gas for heat. Most homes will use $900 to $2400 per year for heating, taking into consideration all types of heating sources. So again any cost savings in oil save these homeowners even more.

It is estimated that there’s an additional $13 billion more in consumers’ pockets since the oil downturn. So where did the savings go? U.S. consumers actually used a big chunk to drive more, go to the movies more, and eat out more. All that explains why holiday season sales improved when holiday sales started slowly. Cheap gas helped retailers salvage a season that started off slowly.

Consumer Growth Partners, a retail industry consulting firm, used Department of Commerce to estimate where the $13 billion in gas savings were spent.

• $4.9 billion more was spent on simply using more gas, so the oil companies actually saw higher consumption at the pump

• $1.8 billion more went to entertainment and services, such as movies, theme parks, content downloads, and smart phone subscription/service fees

• $1.3 billion more was spent at restaurants, fast food, and bars

• $1 billion more went to things like tobacco, beer, and other “sin” products

• $4 billion more went to retailers, broken down as follows;

o Food and beverage stores: $1.5 billion

o Home improvement: $1 billion

o Clothing: $1 billion (this is a key category for department stores like J.C. Penney and Macy’s)

o Consumer electronics: $500 million

U.S. shoppers had $1 billion more in disposable income than last year from other factors, and that helped areas like toys and sports.

There’s also a psychological by-product to the rise and fall of the price of gas. We watch the neighborhood gas station prices like a stock ticker, and we assume that falling prices will translate to better economic times ahead, at least in terms of our personal budgets. Drops in gas prices of even a penny can improve consumer confidence. The consumer confidence indicator is currently at its highest level in almost eight years. I think many of us see the savings almost like a tax rebate. It’s not much, we really don’t plan for it long term, but we welcome the savings.

But as the United States has shifted from being overwhelmingly a consumer of oil to increasingly a producer, the collapse in the price of oil, now below $50/barrel, will have unpredictable side effects for large and diverse sectors of the economy. This includes not just the oil and gas industry, but also finance, manufacturing, and more. The US gained ground in its production from using higher cost methods of producing oil (fracking). These methods of extraction cease to be profitable below $70/barrel.

In the first week of January alone, the number of active drilling rigs in America fell by 61. Each rig employs 50 to 60 people. That’s more than 3,000 potential job losses right there. Oil rig employment peaked in late September 2014, and 180+ rigs have gone idle since, taking with them 9,500 to 11,000 jobs, and that’s just the jobs that are directly tied to the process of drilling.

By the way, those are well-paying jobs. In North Dakota, for instance, the average salary in the oil and gas industry was $111,000 in 2013, more than double the state average, which itself was goosed higher by those high oil and gas wages. They are the kinds of jobs America desperately needs.
Many analysts and economists have been overjoyed at the headline unemployment numbers improving. Our economy added 252,000 jobs in December, and unemployment fell to a 6½-year low. But when you look hard at the numbers, guess what? Nearly 60% of the jobs were in low paying industries such as auto parts salesman, home health assistants, and hospitality. 17.5% of America’s new hires were in food service – waiters, cooks and bartenders.

So, while you and I saved $20+ per fill up, that ‘windfall’ means America is losing six figure per year jobs in the oil patch for less than $10.00 an hour jobs with little to no benefits. Not a good trade.

Once these jobs are lost, you cannot just ‘turn the spigot’ back on. The longer term affect of losing too much investment or stimulating demand could create a price shock in future years as necessary supply growth cannot return quickly once curtailed.

So what are the benefits and negatives of oil values softening?

The positive

Financial experts are excited for when and where consumers spend the money saved on fuel. More dispensable income means more cash spent at malls, movie theatres, and restaurants. This influx of spending holds down inflation and boosts both local economies and the stock market. Energy spending constitutes a bigger part of the budget for lower-income families, lower oil prices help counter some forces that have worsened the inequality of income, wealth, and opportunities.

Dropping prices also help industries not reliant on oil. The automobile industry may benefit from dropping oil prices. Last year was the automobile industry’s best since 2006, according to the National Automobile Dealers Association, with almost 17 million cars and trucks sold. A surge in jobs and more income from lower gas prices gives Americans the ability to buy a new car, perhaps for the first time in a decade.

Lower oil prices will benefit farmers and will eventually benefit consumers as food prices drop. Agriculture is very energy intensive – a dollar of farm output takes 4 to 5 times more energy to produce than a dollar of manufacturing output. That cost savings is then passed on to the consumer in less money spent for groceries.

Lower fuel prices means consumers will be able to travel more. Consumers haven’t seen a drop in airline prices yet. This is because airlines contract to buy fuel in advance, so there is a lag in savings when oil prices drop. But with demand for flying high and the fall in oil prices keeping costs low, airlines are in a profit sweet spot. Nearly all major airlines hit record profit margins during the June through September quarter. Historically the industry has shown in a strong demand environment that they don’t plan to proactively cut fares.

All in all consumers should have more money to spend. This in itself sounds good after the harshness of the recession. However, only 65 counties out of 3,144 are at prerecession numbers or better. That is just over 2% of America’s counties that have recovered. Yes, the national economy is recovering, but we are still over 55% short of prerecession economic numbers with few parts of the country participating. You take away oil production, that number gets divided by more than 50%.

So while low energy prices are immediately good for the consumer, oil is responsible for a lot of jobs and economic activity.

The negative

The obvious impact is oil companies downsizing. Not just big oil, but all those small companies that make their livelihood from the extraction and sale of oil will get hurt from the plummet in oil prices. Not just those directly or secondarily involved in the industry, but the mom and pop stores, diners, and locally owned stores in these areas. Although the lower oil prices are almost certainly temporary, the economic aftershocks will take longer to overcome.

Anything associated to steel and metals suddenly has to revaluate their strategies, and invariably that includes downsizing or closing. This has a definitive long term effect on the rust belt as it tries to recover. Most of this is outside our Texas region.

The nation’s recovering GDP will also suffer, since the energy companies have been doing most of the ‘heavy lifting’ of large capital investment at a time where other sectors have chosen not to or are unable to invest long term in their future.

Falling oil prices are bad for the environment because cheaper oil means fewer incentives to develop alternative and less carbon-intensive sources of energy. Most of these alternatives make sense when oil is above $70/barrel. The falling prices reduce the incentive to develop new oil and gas fields and make it less urgent to create alternative energy sources. That hurts companies in those areas and, because it makes energy less plentiful, means higher costs and fewer energy alternatives once global demand revives.

As prices decline even more, segments of the economy that enable drilling, like the companies that build pipelines, pumps, and drilling rigs, will curb their own investments. In the worst case, even existing equipment would be left idle, further reducing industrial activity. These pullbacks would reverberate well beyond the oil industry itself, into areas such as steel, cement, and other fields that supply the oil industry. This affects much more than our Texas region, reaching into almost all industry and regional sectors as capital investment sits idle.

To increase state and government revenues for new road infrastructure, many support an increase in fuel taxes. America’s fuel taxes are some of the lowest in the world. Also remember most expect these values to be temporary. Taxes based on long term low values is not a popular nor a prudent decision unless we want to be buying $5.00 gas long term. Setting long-term policy in response to volatile oil prices can create unintended consequences. Five years from now, some countries will face much lower prices. Others will be paying more. That may alter global trade and development in ways we can’t predict today.

This is not a plea for the high values we have seen up to last year. Most analysts feel that was unsustainable. But realize that the oil values of today are caused by speculation. Speculation is not a predictable factor for basing long term policy or predicting economic impact.

As stated before, $50/barrel for the Texas region for 90 days is bruising. 180 days or more could have dire effects on the economy. How does this affect you and I? The next six months will tell.

Low oil prices and the Texas economy

For the last few weeks there has been great interest in the decline in oil prices. I wanted to address the many questions I have received about how this will impact the Texas economy. I am not an expert on oil futures, but living in Texas for the last half century has given me a healthy respect for its economic impact.

In recent years, America’s energy boom has added $300–$400 billion annually to the nation’s economy – without this contribution, our national GDP growth would have been negative and the nation would have continued to be in a recession.

GDP Annual Growth Rate in the United States averaged 3.24 percent from 1948 until 2014, reaching an all time high of 13.40 percent in the fourth quarter of 1950 and a record low of -4.10 percent in the second quarter of 2009. The United States has the world’s largest economy, and greatly influences the global economy. In the last two decades, like in the case of many other developed nations, the US GDP growth rates have been declining. In the 50’s and 60’s the average growth rate was above 4 percent, and in the 70’s and 80’s it dropped to around 3 percent. In the last ten years, the average rate has been below 2 percent, and since the second quarter of 2000 has never reached the 5 percent level until late last year. So the energy industry improvement has had a sizable long term economic impact on the nation and subsequently the world.

America’s energy (fracking) revolution and its associated job creation are almost entirely the result of drilling & production by more than 20,000 small and midsize businesses (the majority with headquarters in Texas and North Dakota), not a handful of “Big Oil” companies. In fact, the typical firm in the oil & gas industry employs fewer than 15 people. Many of us don’t think of the oil business as the place where small businesses are created, but for those of us who have been around the oil patch, we all know that it is. That tendency is becoming even more pronounced as the drilling process becomes more complicated and the need for specialists keeps rising.

Fracking, or the shale oil & gas revolution has been the nation’s biggest single creator of solid, middle-class jobs throughout the economy, from construction to services to information technology. Overall, nearly 1 million Americans work directly in the oil & gas industry, and a total of 10 million jobs are associated with that industry. Oil & gas jobs are widely geographically dispersed and have had a significant impact in more than a dozen states.

Oil is off its high of $112/barrel in June of this year. Today, WTI crude oil opened at just $48/barrel. According to the Texas A&M Real Estate Center, as well as University of Texas, economists, oil under $70/barrel begins to affect profitability in the Eagle Ford Shale region in South Texas.

The Texas Railroad Commission is definitely seeing a slowdown in activity as the price of crude oil nosedives. Late in 2014, the state agency issued 1,508 original permits to drill compared to 3,046 permits in October. The slowdown in new permits is a precursor to layoffs to come. The Dallas Federal Reserve currently projects that Texas could lose up to 125,000 jobs related to the falling price of oil by mid 2015.

Global players

Let’s start by looking at the ‘breakeven’ oil price for the world’s drilling projects. This is the level at which the price of oil covers the cost of extracting the oil.

A simpler way to look at when the biggest oil players will start feeling the squeeze from lower prices is the “cash cost.”

Without OPEC action, an outage, or other response, cash cost is the only true floor. Cash cost is basically what it takes to keep oil production going, not what it takes to make oil production profitable or for a government to hit its budget projection. If you drop below your cash cost on a project, you’ve got to turn out the lights.

Below is a chart from Morgan Stanley analysts of operating costs with and without royalty effects currently.

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As you can see on the far right, the Canadian oil sands and the US shale basins are very expensive to tap. Meanwhile in the Middle East, producers basically stick a straw in the ground, and oil comes out.
It’s worth mentioning that oil values can change faster than the fundamentals of supply and demand. In a recent 30-day period the price of oil fell by 20 percent. There was no change in the demand or supply over that month to justify such a large change. What happened is that commodity traders look at expected future prices, based on long-term supply and long-term demand. When the traders’ expectations change, they buy or sell and the price changes.

The fundamentals of supply and demand are straightforward. Demand moves up or down as the global economy moves up or down, but with a pronounced trend toward less energy use per dollar of economic production.

Economists and analysts have been slowly lowering their projections for global economic growth in the coming years, triggering lower expectations for oil demand, triggering lower values (OPEC leaders have also shown reluctance to keep values high).

Very few of these OPEC’s members interests were served by the OPEC decision not to limit production and let the price of oil continue to drop. For example:

• Iran and Iraq are reportedly pleading with Saudi Arabia to stabilize the price and have cut back on their government budgets
• Venezuela, which is basically funded by oil production, is so broke that parts of Caracas are having blackouts.
• Libya has not regained any traction and needs oil to stay high (for this, continued civil war, and many other reasons)
• There’s a huge threat of civil unrest in Nigeria during the upcoming national elections, heightened by falling oil prices. Meanwhile, the Saudis are sitting back, letting prices fall, and trying to starve out American producers — because they can. That said, it does seem that smaller Gulf states like Kuwait and the UAE are on board with this plan.

As you can see there is very little solidarity on where OPEC values should be from the OPEC members. Many of the counties mentioned are not only in economic and political turmoil.

Presently the strongest OPEC member, Saudi Arabia, is trying to reduce US production, particularly as the world moves toward emissions caps and more energy-efficient technologies. But long-term strategy is a luxury of those who can afford the losses.

Oil could go lower. In my lifetime I have seen it hit $10/barrel from a high of $85 in the same year. But keeping it low will crush many of the world’s economies, including Russia. It is hard to tell how long the Saudis want a free market.

Oil price weakness is a function of excess supply, rather than a problem with demand (recession, for example). It is true that much of the developed world is struggling with growth, and the emerging economy’s growth profile is contracting. But global GDP is still growing, and demand for oil is still rising – just not as rapidly as supply.

Regional impacts

How does this affect Texas? The good news is that our state and metro economies are not as single industry based on oil as they were in the late 80’s. Houston, the energy capital of the world, has energy as 20-25% of their total GDP, compared to over 40% in the late 80’s. D/FW is not strongly energy based, so the effect will be minimal presently. San Antonio will have greater exposure, due to their good luck of being close to Eagle Ford shale. Austin will see some impact because of our state and university funds coming from oil.

Texas had tremendous growth from 2010 to 2012, but this ‘mini oil boom” has definitively ended. In the short to intermediate term, the Texas oil patch is more about making the most productive use of existing assets than finding new ones.

If oil stays below $50/barrel long term, it will affect regional banks lending as they call oil loans to protect their cash reserves, which in turn affects all the other outstanding regional loans. So oil prices staying below $60-70/barrel will have a negative effect on our economy, including real estate. The Dallas Federal Reserve estimates if oil stays below $60/barrel the state could lose 125,000 jobs. Texas produces 36 percent of the crude oil in the United States so Texas will be harder hit than other states.

Impact on real estate

Metrostudy’s Scott Davis wrote on the Houston housing blog earlier this year that, “…there is a “sweet spot” between $55 and $90/bbl that produces the highest demand for housing in the Houston market. Above $90 it appears that high energy prices dampen demand for housing because of the squeeze on consumer budgets for housing and, in a market the size of Houston, transportation. Below $55 it appears that demand is lessened because of weaker job growth.”

The chart below came from a research report published earlier this year by the Manhattan Institute, entitled “The Power and Growth Initiative Report”. The author Mark Mills highlighted the importance of oil in employment growth:

MI_PG_Chart2

The important takeaway is that, without new energy production, post-recession US growth would have looked more like Europe’s – much weaker, to say the least. Job growth would have barely budged over the last five years.

Further, energy is not just a Texas and North Dakota play. The benefits have been widespread throughout the country. “For every person working directly in the oil and gas ecosystem, three are employed in related businesses,” says the report.

The next chart is from the Dallas Federal Reserve, and it’s fascinating. It shows total payroll employment in each of the 12 Federal Reserve districts. No surprise, Texas (the Dallas Fed district) shows the largest growth (there are around 1.8 million oil-related jobs in Texas, according to the Manhattan Institute). Next largest is the Minneapolis Fed district, which includes North Dakota and the Bakken oil play. Note in the chart below that four districts have not gotten back to where they were in 2007, and another four have seen very little growth even after eight years.

empdistrict

New oil well permits collapsed 40% in November. Since December 2007, or roughly the start of the global depression, shale oil states have added 1.36 million jobs while non-shale states have lost 424,000 jobs. As stated earlier, the decline will have a dampening effect on the regional and national economy if values stay depressed long term. Low oil prices aren’t good for everyone.

Realize that although oil and energy have played a large part in economic growth, thanks to booms in the Eagle Ford Shale and the Permian Basin, oil production in Texas has soared to more than 3 million barrels per day. Energy has accounted for 11.9 percent of Texas’ nongovernment gross domestic product in 2012, according to the Federal Bureau of Economic Analysis. In numbers the state could lose an estimated 212,000 jobs and $13.5 billion in total earnings. In turn, the Austin metro area could see a loss of 4,200 jobs and $210 million in earnings.

Currently the oil and gas sector, which includes a dozen related industries, accounts for over 400,000+ jobs throughout Texas, about 3.2 percent of jobs statewide. The core oil and gas extraction industry on its own accounted for 111,422 jobs, about 0.9 percent of Texas payrolls.

Positive effects of the decline

The strength of the Texas housing market could be helped by the decline in energy employment. This decline in energy employment could be shifted to the construction industry, reducing the cost of labor, one of the housing market’s key constraints.
In addition, lower gas prices help favor the more remote markets in our metros, opening up lower land costs and encouraging development in the most underserved portion of our regional housing market, entry level homes under $250k.

The real test of the resilience in Texas will come when/if economic indicators go from stable to declining or from sustained out-performance to sustained under-performance relative to the rest of the U.S. However, there is no reason to believe yet that such a decline is either imminent or inevitable as a result of declines in the oil patch. The oil-rig count has already begun to drop as previously mentioned, and it will continue to drop as long as oil stays below $60. That said, however, there is the real possibility that oil production in the United States will actually rise in 2015 because of projects already in the works. If you have already spent (or committed to spend) 30 or 40% of the cost of a well, you’re probably going to go ahead and finish that well. There’s enough work in the pipeline that drilling and production are not going to fall off a cliff next quarter. But by the close of 2015 we could see a significant reduction in drilling.

Employment associated with energy production should fall over the course of next year. It’s not all bad news, though. Employment that benefits from lower energy prices is likely to remain stable or even rise. Think chemical or manufacturing companies that use natural gas as an input as an example. In addition the lower energy costs and potential softness in office will allow more out of state companies to compete.

However, there really aren’t any industries that could replace the jobs and GDP growth that the energy industry has recently created. Certainly, reduced production is going to impact capital expenditures. This all leads me to think that the US economy will be slower in 2015.

One last thought

A decline in the price of gasoline induces people to drive more and not be as energy efficient, increasing the demand for oil.

A decline in the price of oil negatively impacts the economics of drilling, reducing additions to supply.

A decline in the price of oil causes producers to cut production, quit exploring new ways to drill, and will ultimately leave oil in the ground to be sold later at higher prices.

In other words, lower oil prices — in and of themselves — eventually make for higher oil prices.