Last week, we identified 2013 as the year we “felt” the economy improve. What can we expect in the coming year?
On a national scale, the economy continues to recover slowly. The Bureau of Labor Statistics forecasts a slow but steady national recovery. Most consumers continue to remain cautious, so small and big businesses are likewise cautious with hiring and capital investment, which in turn keeps both employment and income at a less-than-desirable growth rate.
The economic picture is different In Texas, particularly in our four larger metros. The Texas economy continues to outperform the rest of the country. Unlike the rest of the nation, we have recovered to prerecession numbers on GDP, employment, and many other economic metrics. In real estate, new and pre-owned values continue to rise, and the number of houses for sale is at the lowest point in a decade, making most of these markets ‘seller’s markets’ with more demand than supply. Commercial, office, and industrial, which made up the bulk of the equity value losses suffered during the recession, have recovered. All these channels should continue strong through 2014-2015 based on projected job growth.
For the past 22 years, Texas job growth has outpaced national job growth 2-to-1. The detractors point to the fact that Texas has created a lot of low-paying jobs (in fact, more than any other state). While the United States has seen job reduction particularly in the lower-income channels, Texas has created jobs in those channels as well as the vital middle-income workers, too. The bottom line—we have experienced growth across all sectors and in all income categories. We added 267,400 jobs since the start of 2013, a 2.4 percent increase. In the first decade of the 21st century, Texas created nearly a third of the nation’s highest-paying jobs, and there has been a nice increase in middle-income jobs as well. The Texas unemployment rate has been at or below the national rate for 82 consecutive months.
It came as no surprise when a study by the highly respected Brookings Institute, as reported in the Wall Street Journal, revealed that only 14 of the nation’s 100 biggest metropolitan areas have more people employed than they did before the 2007–09 recession, and that six of them are in Texas: Austin, San Antonio, McAllen, Dallas, Houston, and El Paso. “Robust employment in the oil and gas industries helped the Texas cities,” the article read, “although data from the Texas Workforce Commission suggests the job recovery has come from a variety of industries.” In the late 80’s it was the energy field and the collapse of the savings and loans that hobbled the Texas economy. The good news is that not only has the Texas economy grown stronger, but broader based as well.
Earlier this year, a Milken Institute study on high-tech centers across the U.S. concludes that Texas has three of the top 25 high-tech centers in the country—Dallas, Houston, and Austin. That said, San Antonio has had a 27% increase in high tech workers the last four years due to Rackspace and Geekdom. Although San Antonio didn’t make the list it is making rapid steps to be included and watched in the future.
Tougher mortgage and bank lending rules
The rules and regulations put in place by the 2010 Dodd Franks financial regulatory bill, capital requirements of Basel III, and the continued hyper regulation of the Consumer Financial Protection Bureau will all make lending harder. The upshot of this regulation is that banks are likely to narrow their loan offerings and rely more on thirty year fixed rate mortgages, a product unique to the US and one that has required a government guarantee. Currently, over 95% of all loans are backed or controlled by government backed agencies, which is something the Federal government would like to get away from. With less banks to lend, offerings will be limited, which nationally as well as regionally will place small business lending in a harsher environment. Before you point out that record profits are made by the big corporations, realize that 85+% of our GDP is small business. The regulatory constraints put on them the last few years make their need for capital paramount, just when this harsher regulations are coming into action.
The CFRB released new mortgage rules for qualified mortgages. The new rules come at a time when regulators and banks are trying to find a middle ground between overly lax and overly tight lending standards. For years, the lending pendulum has never been just quite in the middle, either too lax or too harsh. 2014 looks like it will continue to swing to the harsher side. The new guidelines and harsher parameters for both buyers and lenders will in all likelihood make it harder to qualify for a loan and from a lender standpoint, harder to lend. Because of this, mortgage lending will be a more difficult environment through 2014 – the bottom line is that it will be harder to qualify than it has in many years, slowing down home sales.
Real estate will continue to increase in value
Buying a home will be more expensive in 2014 than in 2013. Although home price increases should slow some from this year’s fast pace, prices will continue to rise faster than both incomes and rents. Also, mortgage rates will be higher in 2014 than in 2013, thanks both to the strengthening economy (rates tend to rise in recoveries) and to the Federal Reserve tapering its bond-buying program, whenever it comes. The rising cost of homeownership will make homes less affordable for some.
As evidenced by the impressive job creation numbers above, the Texas regional economy should continue to outshine the rest of the nation. Driven by continued employment and population growth, analysts estimate that the region’s employment rate will experience a 3% growth rate annually over the next two years. This growth will bring the Texas metros to double their current populations within the next 20 years.
Because of this job growth, the rental market will remain tight. All four Texas metros have seen a continued ‘ seller’s market’ with greater demand than inventory. Rental and sales values should continue an upward swing, with an expected easing somewhat at the end of 2014 as more finished development comes on line.
Low inventory will keep values high. After five years of not building, developing, or lending for anything, you can’t just create the inventory needed overnight. With the residential housing markets stabilized, as well as office, industrial and retail we have begun to see limited inventory being addressed with new construction this year and well into 2015. As discussed here some areas may be at a tipping point, but the vast majority of real estate channels will continue to pay catch up. As we have stated before, there just isn’t enough housing, office, industrial, etc. to address the influx of businesses moving here.
The lack of developed lots and land continue to define the Austin market. Remember it traditionally takes about two and a half years to buy a piece of land, get it entitled, and start construction of homes. So, anything bought today will take at least that long to come to market.
Apartment development may start to slow. With the tremendous demand for apartments during the recession, boosted by increased demand from homeowners-turned-renters, multi-family building surged across the nation but particularly in Houston, Austin, and DFW. This channel of real estate may be at a tipping point, where development may slow to gauge demand and potential of oversupply. But that’s likely to quiet down in 2015, as supply and demand may have swapped places – and there may actually have been too much multi-family building in 2013-14.
Also limiting inventory is the construction labor shortage. The slowdown and recession caused by the housing bubble forced many construction workers to move on to other jobs and put many production builder companies and subcontractors out of business. Some of the delays are being caused by shortages in the concrete and framing trades, causing problems in even the first construction phases. The median labor wage hike nationally as well as locally is around 4%, with a maximum of 15%.
This shortage is not only increasing the price of labor and putting pressure on margins, but also it is increasing the time it takes to build a house. A survey of builders locally shows that the average time it takes to start and finish a home in Austin, from start to finish, has climbed from four months to over seven months. But not all of the start delays are being caused by worker shortages. It’s also taking builders longer to get permits because local municipal governments have cut staff. It has already begun to impact the time it takes to start and finish homes.
This is life on the other side of the housing crash. Home starts are climbing, prices are up, and builders can’t find enough workers. Austin and Texas have been adding construction jobs since mid-2012, and some builders still can’t finish homes on time because framers, plumbers, and even cleanup crews are in high demand. Many skilled workers from before the recession have moved to better paying oil and gas jobs or moved back to Mexico. Potential new workers failed to get into the pipeline, because construction woes dragged on for so long.
Also compounding construction is that newcomers aren’t arriving from Mexico, at least not like in the past. They used to be a crucial labor source for fast-growing businesses. Builders and subcontractors don’t want to be quoted on immigration, because it’s such a political issue, but they believe it’s a big factor in the labor shortage.
In April of 2012, the Pew Research Center estimated that net migration between the United States and Mexico had flattened and perhaps reversed from 2005 to 2010. In five years, slightly more people moved to Mexico. A decade earlier, in a similar five-year period, almost 2.3 million more moved from Mexico to the U.S. Pew attributed the recent standstill to many factors, including the weak construction job market, tougher border enforcement, and a rise in deportations. As the economy picks up, Mexican immigration could resume.
Builders are hoping and counting on it. They’re OK with the labor shortage, partly because it’s better to manage a growing business. But they also hope it’s a temporary condition. As word spreads, they expect labor markets to respond, whether from the unemployed, other states, or Mexico.
Six years ago, housing starts peaked in Central Texas and then slowed. Only recently has the recovery looked solid and sustainable, so it actually feels good to have a labor shortage. Texas is ahead of the curve. While hiring here is up in 2013, construction employment nationwide had been wallowing around the bottom for more than two plus years, until 2013. As the market improves nationally, it will but pressure on raising labor prices which have been stagnant the last 6+ years, again adding to the cost of homes and construction.
There are potential hurdles this year. 2014 in Austin will stay strong on most real estate channel, and the rest of the nation will continue to improve slowly, putting added pressure on our regional needs for labor and materials across all channels. Even with the hurdles mentioned, 2014’s forecast for our metros and the rest of the state will be head and shoulders above the remainder of the nation and most of the world.