Challenges and opportunities in the residential market

This month, we have received a lot of calls concerned about the lack of showings and sales in the market. We have been asked by realtors and clients to comment on why this may be.

• June is when most families go on vacation before camps, summer school, and the other activities of summer. Late August and Thanksgiving through Christmas are the other slow time in residential real estate.

• It still is very much a seller’s market in all channels in Texas. The biggest challenge is finding the right property.

• Don’t compare this year to last year. This year is not as strong as last year, but last year was an outlier (above average) year and should be averaged with the previous ten years to set realistic expectations.

• Resales – the first five months have shown the effect of a great year last year. All four Texas metros started slow at the beginning of the year. Since March most metros have seen improvement here in Texas and the end of the year should have good numbers comparatively. Will they beat last year’s volume? It’s hard to say, but they ought to be close due to demand and lack of inventory. However nationally as well as locally, loan applications and starts have slowed starting June1st.

• New home sales – New home sales are good. They are not back to prerecession numbers, but most communities are reporting improved absorption in all price points. The biggest challenges are the lack of quality developed lots and escalating construction costs, leaving many potential buyers in sticker shock.

• Multifamily – starts are down a little from the last two exceptionally strong years in all Texas metros. Austin, San Antonio and Houston are nearing a saturation point on new product, but have not caused concessions from landlords and rent values continue to improve even with new product being introduced to most markets. Most new construction clients are taking a wait and see attitude on their communities as they assess the depth of the market. Occupancy continues to be in mid 90’s in most markets, truly a sign of strength.

• Commercial – three years ago, we saw commercial equity and buyers interested in class ‘A’ distressed real estate. Two years ago, class ‘B’ and ‘C’ began to have more interest and participation. All those opportunities have been shopped numerous times with large equity recircling and looking at large class ‘A’ opportunities that have not traditionally been on the market. There still is a lot of equity sitting on the sidelines looking for opportunity, due to the steadiness and small but comfortable appreciation that makes the Lone Star state attractive.

So, what else are we seeing?

Cash continues to be king

All-cash offers have increased in popularity starting in 2009 at the height of the rescission especially for foreclosures and short sales, as banks/sellers would rather get less money than deal with the hassles of financing. This year is no different with all cash transactions making up 30+% of the national market and closer to 40% in the Texas metros. Most sellers want the quick closing, rather than a higher value. This in turn has helped most markets to establish good values and appreciation. The good news is the banks and lenders are looking to lend more aggressively. The bad news is that there are no more deals at the banks. Those individuals that still believe that there is opportunity buying from the lenders in a ‘sellers market’ will be shocked. Banks and lenders are still being told to get their loans in compliance which is putting pressure on down payments and cash flow of all acquisitions more than a year ago.

Smoother short sales

As lenders and real estate professionals have become more accustomed to short sales (sales in which the proceeds are less than the outstanding debt), the process is becoming more streamlined and successful for all parties involved. The bigger issue is that they aren’t as prevalent as year or two ago.

Adjusting to appraisal rules

In Texas, the median price for existing single-family homes increased by 4%+ in all metros in the last decade. The good news through this is Texas weathered the national real estate crunch without significant damage to property values but sales and construction activity slowed. Despite its continuing resiliency, Texas was not immune from the national real estate crunch. However, due to the government’s Home Valuation Code of Conduct passed in May 2009, property appraisals continue to be more expensive and take longer, sometimes hindering (or breaking) real estate deals. What do you need to look for? Concessions/upgrades by the sellers are having a hard look by appraisers as discounting (i.e. taken off the sales price). In reviewing a number of contracts that failed, the biggest issue was how the contract was written. It is more important than ever that you talk to your lender before you write the contract.

Increasing construction costs

The market has turned nationally, regionally, and locally. Banks and lenders are lending to finance new housing projects for builders or developers. However with this new activity and lack of manufacturing facilities or available labor, there’s a chance of double-digit increases in new construction through the end of the year and into next year (according to the McGraw-Hill Construction Outlook Report). The house you look at today will be more expensive this time next year.

Rising mortgage rates

Mortgage are higher than last year – however, they are the second lowest they have been in the last 5,000 years (yes, I have data to back that up). When you are looking for a mortgage on a home, suddenly there seems to be a lot of confusion and unanswered questions out there. Unfortunately, it seems every answer lies in the halls of Congress – and it appears this morning they’ve reached some agreement. For you that read my blog regularly, you know that I feel that the harsher Dodd-Frank and additional lending rules have not helped the borrowers. The biggest question currently is if lenders will be required to keep 5% of mortgage backed securities volume in reserves as risk retention. This could ultimately drive many small and medium lenders out of the business, allowing just a few of the large lenders to lend.

The consumer needs to understand that this is the second lowest we have seen rates in our lifetimes. The Fed’s effort to keep mortgage rates at historic lows has continued to be eased and rates are responding. These are historic times for rates and affordability. Homebuyers should act now to capitalize on the lowest interest rates in years (whether it is a refinance, purchase or to start looking).

Lending standards are harsher

It doesn’t matter. If you are going to borrow, be prepared for this and work with a reputable lender. With the subprime mortgage debacle in recent memory and the current commercial loan issues still lingering in regulators minds, lenders will continue to require stellar credit and thorough documentation from borrowers. It is even more important to work with your lenders on preparation of what you need and how the contract should be written.

Improving home values

The outlook for home values is good, particularly in Texas with a slow rise in home prices in 2011-2012, and more dramatically last year. Nationally, however, many markets are a long way from full recovery.

Jobs and employment

You have been under rock if you are not aware of the strength of the Texas job market which has led the nation over the last number of years, and improved over 3 points in the last three years. Seven states are at prerecession numbers, and only Texas and California are creating jobs at any great pace. The Texas unemployment rate has been at or below the national rate for 88+ consecutive months (over seven years).

What are you waiting for? It has been a seller’s market for the last 2+ years across this region. Other than a catastrophic event, don’t wait for the buyer’s market. This is the most affordable time to buy! As pessimistic as this analyst has been in the past, we have a long run of economic forces that should continue positive for many years. As 2014 looks to be another year of improving real estate values and a dwindling inventory of homes for sale, it will still be the best opportunity for buyers to cash in on real estate deals before the market moves away from them. I understand that this is not the market that they have seen the last few years, but they need to understand the dynamics and strength of the market long-term comparatively.

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