Sales volume versus apprecation

Real estate continues to grow in Texas. Single family home values have increased 10.8% in the last twelve months, but we are still below the sales volume peak of 2005. Will we surpass that benchmark soon?

To better address this question, let’s revisit this chart and examine where we are in the real estate cycle.

citi-housing-cycle-chart

All four Texas metros and almost all their submarkets are someplace between recovery and expansion.

• Recovery – defined by, lack of inventory and better than normal appreciation.
• Expansion – household creation is greater than inventory and rates are improving. There are many of our suburban markets that will begin to see more inventory in the next couple of years.

For growth to continue, the sales volume needs to grow in addition to price appreciation. For sales volume to grow, we need more inventory. In all four metros demand outstrips inventory. Again, the biggest obstacle to improved sales is the need for more inventory in all channels. That said, home sales are hampered by the lack of inventory as well as the present economic climate. Values should continue to increase at a slower rate through 2014, and by 2015-16 we will begin to see new home and commercial inventories begin to increase.

Are we back to ‘pre-recession’ numbers? No, again the lack of inventory and financing has prevented new development t. Until we have enough lots (2+ years out in most metros), inventory will be challenged. Austin will lag behind the other Texas metros because of the longer entitlement process.

Texas metros have consistently strong job growth. Over 40% of all jobs created since 2009 in the US have been in Texas. Texas has created over 270,000 jobs the last 12 months, primarily in the metros but spread out over the state due to the oil shale play. The recent population influx have absorbed much of the available inventory and have driven Austin, San Antonio, Houston, and DFW values to new highs.

The median home price for home resales in the state for a existing single family home is $178,000, 10.8% higher than 12 months ago. Compared to the national median home price of $222,000, Texas continues to be a value. Below is a comparison of the Texas metros.

Median home price in Dallas $202,300
Median home price in Ft Worth $137,500
Median home price in Houston $192,000
Median home price in San Antonio $176,400
Median home price in Austin $240,000

The combination of growing interest rates and growing prices will impact consumer perceptions of affordability. Over the last four years most of the Texas metros have somewhat shrugged off price and rate increases. Over the last two years, the housing market has been lulled to sleep with historically low rates. The fact that the rate increased has been more shocking than the actual rate itself. The opportunity to see these historic lows is gone. While the current rate of 4.4% is not as low as the record setting rate a year ago, it still provides strong affordability for today’s consumer.

What is slowing sales? Current single family lot availability in the our metros. Remember for every two jobs, the market standard is one home start to keep up with demand. Both Austin and San Antonio have just over 15,000+ developed lots ready to build on. Not all are desirable for building and the vast majority have been sold or optioned to the production builders. Houston has just under 40,000 lots ready, and DFW closer to 50,000 developed lots.

In all Texas metros, the number of available lots will not keep even with demand. The result of this is higher land, lot, and labor prices. As higher lot pricing results in new home pricing in many areas we expect some push back from the consumer who will be forced to the resale market or more affordable locations. In the regional metros, this developed lot inventory shortage will last a couple of years.

How can you know how your local market is doing? You may need to do your own research to find the answer. Dig up facts and figures about your own city or town and then combine that data with information about national trends to formulate your own conclusions.

Plenty of data are as close as your keyboard, though the process of sifting through it may take quite a lot of time and thoughtful analysis. For starters, here’s an overview of some of the data and the organizations and agencies that collect and disseminate it:
• Supply of for sale homes: National, state, and local Realtor associations
• Foreclosure rates: Realtytrac and the Dallas Federal Reserve
• Median and average home prices: National, state, and local Realtor associations
• Number of homes sold this year as compared to previous years: National, state, and local Realtor
associations as well as Zillow and Trulia (realize that the two internet sites have a disclaimer of a 25% discrepancy in values)
• Employment: US Bureau of Labor Statistics. Make sure to look at the total unemployment rate (U6) in addition to the standard ‘headline rate’ (U3)
• Residential constructions starts: US Census Bureau as well as your local home builders association.
• Homeownership and housing vacancy rates – US census bureau and apartment associations.

Here in Texas, Independence Title has quick access to these and much more data and information as you look and have questions. Talk to you local reps.

So is the local market better? Absolutely, prices are rising, but not enough to price buyers out of the market and not nearly enough to reach bubble levels. What we see is a market that is on a healthy, sustainable growth path. Even with the recent price increases, local home prices regionally and locally remain undervalued relative to fundamentals. Another example of why today’s prices are actually still a rebound, not a bubble.
Buying continues to be cheaper than renting in all Texas metros, and demand far outstrips supply in all metros and many of our smaller towns. The competition for homes has led to bidding wars in some places.

For some of those that bought in the last four to five years, prices may have not gone up enough to enable homeowners to sell and recoup enough to put down on a move-up home. Also, distressed sales have not been that much of a factor in the Texas markets. The hope is that the lack of listings should begin to change sometime this year, analysts say, as pent-up demand, historically low interest rates and slightly higher home prices prompt more move-up buyers to list their homes. One caution is that you better have your new home under contract before you put your property up for sale. Many move ups and move downs are finding their properties sell before they have found a suitable replacement. For the foreseeable future, if home shoppers see a desirable property, they should move quickly, because in this tight market they can be sure that someone else will.

Real estate is not going to get cheaper. Almost all Texas metros have become sellers markets. In addition, the number of people who think now is a good time to sell has climbed to its highest levels in over three years. The sentiment toward buying a home appears to be catching up with the strengthening housing market, as evidenced by all the media stories as well as actual local and regional studies.

Interest rates on 30-year fixed mortgages, now at about 4%, remain near historic lows, even with their recent uptick. Analysts predict rates to continue to rise, but that shouldn’t slow this market. In fact, historically the prospect of rising rates prompts many to purchase homes because they anticipate the increase.

Most analysts expect rates to climb to around 5% by this time next year as the Federal Reserve scales back Quantitative Easing but adds that won’t significantly affect home sales. One reason is that 1/3 of current home sales are done in cash. Most of those sales are to individuals, not to institutional investors that tried to drive down home price with mass purchases during the foreclosure wave.

Moreover, the costs associated with securing some loans are rising, as well. The Federal Housing Administration last spring once again increased its one-time upfront mortgage insurance premium for minimum down-payment loans (less than 5% down) to 1.75% of the loan, while raising its annual monthly premiums to 1.25%.

This year, those premiums could increase again. The Federal Housing Administration Fiscal Solvency Act of 2012 gave the FHA authority to raise premiums to as high as 2.05% annually to build and maintain its reserves, which are at record low levels. If that happens, the increase would tack an additional $133 onto the monthly payout for a $200,000 loan.

Even with rapid appreciation, we still are not worried about a bubble. Visit the Independence Title blog for a much longer detailed explanation. Almost all of the Texas metros and cities are playing catch up from the recession. In addition, we have a greater annual demand almost everywhere. Values, rents, costs are all increasing. Building costs are increasing at an even greater pace.

So when will business get better? It already has and will continue to as builders, banks, developers aggressively try to address demand while staying within acceptable values. Will we hit the record sales volume number we saw in the boom? No, not for at least another 2-5 years. We just don’t have the supply in place.

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