Metropolitan job growth drives demand for all real estate channels

The median price for homes in the state of Texas hit another all-time high in June 2014 in the four major metros, and demand for homes in the state continues to be strong, but demand has seems to reached a plateau in the last couple of months with values and rents continuing to remain strong while sales have dropped slightly. Office, retail, and most commercial channels continue to have strong absorption with few concessions.

On a statewide basis, 295,769 single-family homes were sold in the last 12 months, up 10.73% from the previous 12 months. This represents the most homes sold in a single year since the boom years of 2005-2006. However, in August 2014, there were 27,999 sales of existing single-family homes, 1.2 percent less than in August 2013.

Continuing the steady increase seen in recent years, prices for Texas homes were extremely strong in the second quarter, hitting an all-time high for the quarter. The median price in 2Q 2014 was up 5.87% from the prior year, reaching $187,300. The average price rose 5.28% from the prior year to $246,209. According to the Texas Association of Realtors, those are the highest figures for median and average price ever seen in Texas real estate.

Texas and California continue to lead the nation in job growth, with Texas capturing over 40% of all jobs created in the country in the last 12 months. The effect on local residential markets has been dramatic.

Austin

Austin continues to create jobs and have one of the most healthy labor and real estate markets in the state. Although Austin will probably have a record year in resales, the lack of supply of resales and new homes continues to present challenges to buyers. Austin area home sales declined for the second consecutive month in August 2014 as rising home prices and housing affordability issues continue to affect the Austin-area housing market. Austin area home sales decreased four percent year-over-year to 2,835 single-family home sales in August 2014. Resale home inventory continues to dwindle in September of this year, hitting just 3 months (6 months is considered the equilibrium of a sellers and buyers market).

Austin is looking at 9,800 to 10,000 new home starts this year. Delivery has begun to catch up to demand, with builders aggressively looking for developed lots to meet demand, but also seeing a slowing demand for speculative inventory over $500k. The production builders who are able to deliver homes under $250,000 continue to have more demand than product.

Austin not only has one of the state’s lowest unemployment numbers (4.6%), but has been creating 22,000 to 30,000+ jobs for the last three years. Traditionally, for every two jobs there should be one housing start, however with rates creeping up around a point, cost of land, materials and labor, there has been a shift of buyers pushed to rentals. The new formula is closer to three jobs for one housing start. The new employees still need shelter, however their options now are limited to resale or rental. The good news is that demand is still strong in the $250,000 and below price range and apartments continue to lease with little to no concessions. The statement about rental concessions is significant, seeing that Austin as well as the other metros have been leading the nation’s apartment construction for the last 3 years, leading many analysts to think that overbuilding is a risk. However, due to the demand rents and occupancy continues to lead the state.

A majority of Austin area homes are now priced out of an affordable range for first-time and first-time move up homebuyers, where a significant portion of home sales historically occurs (30+% historically, now around 7%). According to the latest ABOR report, the median price for single-family homes jumped 11 percent year-over-year to $247,500 and average price rose nine percent year-over-year to $311,414. Single-family homes continued to sell quickly as they spent an average 42 days on the market, one day fewer than August 2013.

San Antonio

San Antonio remains on track to end the year with job growth in the 2.5 to 2.6 percent range, a 2.5 percent rate means the area will produce a net gain of about 22,800 jobs this year. The job-growth rate is mostly good news. It’s faster than both the national rate and San Antonio’s long-term job-growth pace. But it’s slower than the forecast for Texas as a whole with San Antonio’s job growth between July 2013 and July 2014 at 2.17 percent, which is below the state’s 3.22 percent but higher than the U.S. pace of 1.88 percent. All other large Texas cities except Dallas were higher than San Antonio during that period. Last year was a bit of a struggle due to the high number of civil defense job layoffs (85,000+/- in Texas affecting El Paso/ Fort Bliss, Killeen / Fort Hood, and San Antonio / Fort Sam Houston, Lackland Air Force Base, and Randolph Air Force Base), however this year San Antonio has averaged under 5% unemployment, a number that a number of national metros covet. So even with the layoffs, the market has gained traction in most areas.

With one of the nation’s largest oil shale plays nearby and the increase in high tech jobs, the market will be challenged to meet demand. Resale inventory is at a six year low with just over 4.5 months supply and most properties selling for near full list price (95+%). Apartment occupancy is just under 92% with rents rising above a $1.00 per square foot. While this is not as robust as other Texas metros, it is still attractive for many investors. The good news is the rental market remains strong even with new units coming to the market. Like Austin, the lack of completed developed lots is a challenge and has led to tremendous activity in large land tract sales to builders and developers.

DFW

Dallas / Fort Worth continued to improve this year with a healthy 120,800+ jobs created in the last 12 months, led by the professional and business sector with over 45,800 jobs. This surge of quality jobs has created housing demand.

Over 15,200+ apartments are to be delivered over the next 12 months with occupancy staying above 94+%. Multifamily construction and completions have picked up significantly in the Dallas/Fort Worth region. That would normally cause concern for equity as supply could outstrip demand. However, substantial growth in the Dallas/Fort Worth economy and other demand drivers have helped maintain absorption enough to mute the effect of elevated supply. The Metroplex market demand for new product class ‘A’ has been strong, and ‘B’ and ‘C’ class demand remains strong as well. Such demand has prevented significant occupancy declines, giving apartment management and owner’s confidence to continue raising rents. In particular, middle- and lower-tier market segments in the Dallas metro have exceeded rent growth expectations.

The big questions moving forward are: can the middle and lower tiers maintain that pace, and how long can top-tier units continue to show few side effects from apartment development and a strong single-family home market – especially now that (presumably) much of the pent-up demand will begin to be burned off? In particular, the Metroplex’s ability to absorb new apartment product will face more trying tests going forward, as 14-year high construction volumes promise to push supply levels even further over the next two years.

The lack of resale listings is slowing home sales in most desirable Dallas-area residential districts. The inventory of homes being marketed by Realtors has fallen to less than a 2.5 month supply in the Metroplex, allowing values to continue to improve. The second quarter of 2014 improved over 45% from the first quarter, but demand has slipped a little, 2.5% less than this time last year.

Home starts and development will remain strong for the rest of 2014 and into 2015, with developers / builders following the same script of the other Texas metros in trying to secure as much land as possible. In contrast to the roaring growth in multifamily, single-family home construction has increased at a more gradual pace. The slower growth is partly due to constraints on the supply side, such as a shortage of developed lots, higher construction costs, and widespread labor shortages. Dallas home price appreciation is slowing, increasing 0.2 percent in the second quarter, according to the Federal Housing Finance Agency purchase-only house price index. Year over year, prices are up 6.5 percent.

Like most of the Texas metros, the Dallas / Fort worth area is still facing an inventory shortage. A steady, ongoing supply of new housing stock — particularly in the entry level and first-time move-up market – continue to face challenges. This channel was over 30% of the market and has fallen to less than 10%. These homebuyers represent a large majority of home sales historically and their equity growth and ability to move up will be crucial to Texas housing market growth.

Office markets are healthy, as Dallas/Fort Worth’s office market continues to improve this year as corporate expansions and relocations improve job creation and boost office demand. A great example was the market’s ability to recover relatively quickly from large corporate move outs. Plano, for example, was dealt a blow late last year from Encana Corp.’s (Canadian natural gas company) decision to vacate its newly built offices, but the city has since been selected by FedEx and Toyota for their new corporate headquarters. Combined, these two relocations alone will bring an estimated 5,200 jobs to the area within five years and will attract secondary supporting firms. The Metroplex has shown an envious ability to recover from overdevelopment and building the last few years. A great example is Richardson where over 30% of all office space was available for lease just five years ago, but the corporate campuses for State Farm and Raytheon has sparked a dramatic turnaround in recent quarters. Downtown Dallas has also received a boost from major office-using tenants, with Tenet Healthcare leasing 242,000 square feet and Santander Consumer USA committing to 350,000 square feet in the area. In Fort Worth, the North submarket, which includes Alliance, reports the lowest vacancy rate, though the Northeast and Mid-Cities areas recorded the most tightening over the past year.

Houston

The Houston economy continues to lead the nation with over 112,000+ jobs created in the last 12 months. To say the economy is doing well is an understatement. Houston continues to remain strong with a booming energy market, strong trade, and surging real estate development activity. If you have not been able to go to the Woodlands in the last year, you need to take a field trip. The relocation of Exxon and Occidental to the area has caused tremendous growth that has to be seen to be believed. Demand in all channels in this 30,000+ acre community is off the charts.

Although it is off the 2009 high of over 20,000 new apartments delivered, Houston continues to have strong construction in the apartment sector. 2014 should have 12,000+ apartment units being deliver this year, and rental occupancy has stayed steady at 94%. Resale and new home sales struggle with the tremendous demand for inventory, although we saw sales slow this September. Like all of the Texas metros, resale is definitively a seller’s market with just a 3.2 month supply. Like the rest of Texas, land developers of residential, office, and retail are quickly securing positions and starting construction to address the demand.

Citywide, August delivered gains in both residential home sales volume and prices. Housing inventory held steady month-over-month, but is tracking slightly below 2013 levels. While prices were the highest for an August on record, they fell short of the all-time records set in June 2014. Single-family home sales were up tad, at 1.1 percent versus August 2013. Months of inventory, which estimates how long it will take to deplete current active housing inventory based on the previous 12 months of sales activity, matched July’s 3.0-months supply, lower than the 3.3-months supply of last August. It is significantly below the current national supply of 5.5 months of inventory.
Residential values continue to show the strength of the market, with the average price of a single-family home up 6.4 percent year-over-year to $275,369. The median price jumped 10.4 percent to $206,000.

The tremendous job growth and corporate expansion continues to intensify in Houston, driving demand for office space and sparking a construction boom. This year, developers will complete more than 11 million square feet of office space in the metro, which represents the highest total on record since at least the turn of the new millennium. Pre-leased office towers and build-to-suits will account for a sizable share of deliveries through 2014-15, and demand appears strong enough to absorb much of the new construction that remains available. Approximately 85% of the 4.4 million square feet delivered in the first half has been spoken for, and pre-leasing of buildings slated for completion over the balance of the year already exceeds 70%. The market’s recent performance and a dwindling supply of large blocks of Class A space suitable for corporate tenants have renewed speculative development in the metro.

Conclusions

After reviewing most of the state, residential sales demand has slowed, yet values continue to improve, and will allow somewhere between 5-7% appreciation of most residential real estate throughout the state. This lack of sales demand is to be expected with new and resale inventory improving. Even with the tremendous growth Texas has seen over the last number of years, with supply improving, values will remain strong but may be challenged to continue. They should still see appreciation, just not to the degree we saw in 2013. Other channels of real estate will bear watching throughout the state, since many are at a ‘tipping point’ of supply overwhelming demand.

With such strong supply and continued demand, the inventory of Texas resale homes has remained in a ‘sellers’ market. The Texas market had 3.7 months of inventory, and has remained there much of the year. A 6-month supply of homes in a market indicates a balance of supply and demand. The Texas inventory supply indicates strong demand for homes of all values, but particularly entry level.

The point of this exercise is that with mortgage rates and home values continuing to increase, Texas metros as well as many smaller towns continue to see appreciation to the point that waiting to buy does not make sense. The home you look at today will not be there tomorrow. Whether this is just a couple of years of appreciation or a longer cycle for the majority of the state has yet to be seen. However, it is safe to say that buying today is a wise investment.

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