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.

 

What factors are important when looking at real estate?

If being in the real estate industry was easy, well, then everyone would be doing it.

However, the truth is that no matter how wise or smart you are, no matter how many connections you make, no matter how hard you work, no matter how much you read and learn, there are certain factors you simply can’t control when it comes to the real estate market. Here are some things to consider when evaluating real estate, whether it is buying a home or an investment.

When selling a home, or investment real estate, there are many factors which affect market value and the eventual sale price of a home, such as location, condition, size, amenities, features, improvements and upgrades, local economic conditions, the current real estate market and mortgage interest rates, among others. Some of these factors are within the control of the owner, and others are beyond the control of the owner. Real estate ownership has been blessed with appreciation in values, but that appreciation is not always in a straight line. Real estate values are not static. Over the long term, an investment in real estate is generally considered the most valuable type of investment, one with the best financial returns.

Reality check

All owners would like to get the price they feel they should get for their home when they choose to sell. The reality is their home is worth what a buyer is willing to pay. First remember economics 101 – supply and demand. Lower supply greater demand than higher value. If supply outstrips demand, values drop appropriately. Most of Texas is in a seller’s market, where demand is outstripping supply. Also, remember a buyer will not pay more for a home than what they would have to pay for another home with similar features and amenities in a similar location, something called the “Principle of Substitution”. Put simply, what else is on the market that is similar to this price?

The price paid for a home one year ago, three years ago, five or ten years ago has nothing to do with what the home is worth today. Real estate values exist at a fixed point in time. A home may have been purchased for $300,000 three years ago, and may be worth $315,000 today. Someone else may have bought a substantially similar home for $250,000 five years ago and it is worth $315,000 today. That is a drastic difference in equity in a relatively short period of time. You cannot take the annual appreciation of one year and plan to use it as a constant portion of the equation. Real estate fluctuates in value almost every year, usually on the positive side. One year it can be less than 1% another, the following year 12%, all depending on supply and demand. That appreciation is not always in a straight line.

As stated before, all real estate is local, therefore values appreciate differently within the same local. A sale in one part of a city has little to no effect on properties in other portions of the city. The good news is that for most real estate is the one asset that maintains and appreciates in value in the long term. While it is true that that the condition of a home has a definite affect on its market value, and that a well maintained home will sell for more than a home in need of updating and repair, the actual cost of making repairs and improvements may not be equal to the increase in market value. Why? Cost does not necessarily equal value in real estate. Repairs and improvements are two different things.

Depending on the market conditions when the home was purchased, some owners were fortunate and purchased their home in a buyer’s market before the increases in real estate values like we witnessed after the tech crash between 2001 and early 2006. Others may have bought at the end of a strong real market and were forced to pay top dollar in a highly competitive sellers market, as many owners in other parts of the country are experiencing now who purchased their home in 2006. It is economic market conditions, the economy, employment, mortgage rates and supply and demand that create changes in the real estate market and cause real estate values to increase, remain stable, or perhaps drop at different periods of time. These are the factors that are beyond a seller’s control.

Real estate is typically a long hold period compared to many assets. To look to invest in real estate as a short term investment usually has harsher consequences. A great example of short term real estate investment is flipping, which entails buying the investment underneath market norms and selling around the middle of the surrounding market values. It has the risks of any other speculative investment. It can be high risk because it is a short term investment play. If the investor can hold long enough, most markets will increase in value due to the lack of inventory and demand outstripping supply. Decisions to sell may be more difficult for owners with short term ownership especially when real estate values have not increased or have dropped since the home was purchased. Home owners with short term ownership may have mortgage balances higher than the value of the home and a sale would require bringing cash to the closing to pay off the mortgage balance. Home owners with long term ownership and substantial equity can make selling decisions easier than owners selling their home without the benefit of real estate appreciation. In either case, the real estate market is the real estate market, regardless of when the home was purchased, and the home is worth what is worth.

There are many factors that affect the value and acquisition of buying and selling real estate on a national scale.

Economic factors

Like it or not, it seems like every real estate downturn gets blamed on the economy. There is a reason for this. The state of the economy plays a huge part in the amount of money that is available for people to buy homes. This is generally measured by economic indicators such as the employment data, manufacturing activity, the prices of goods, etc. Broadly speaking, when the economy is sluggish, so is real estate. However, the cyclicality of the economy can have varying effects on different types of real estate. For example, if a REIT has a larger percentage of its investments in hotels, they would typically be more affected by an economic downturn than an REIT that had invested in office buildings. Hotels are a form of property that is very sensitive to economic activity due to the type of lease structure inherent in the business. Renting a hotel room can be thought of as a form of short-term lease that can be easily avoided by hotel customers should the economy be doing poorly. On the other hand, office tenants generally have longer-term leases that can’t be changed in the middle of an economic downturn. Thus, although you should be aware of the part of the cycle the economy is in, you should also be cognizant of the real estate property’s sensitivity to the economic cycle.

The economy obviously pays a huge impact on how banks and equity or lending institutions will lend. If lenders are recovering from bad loans, the opportunity is not as great. Factors such as politics, both on a local as well as a national stage, can restrict or open financing for real estate. We need not look farther than the recent real estate and financial bust to see the effect of liberal then conservative lending parameters and its effect on not only the economy but real estate in general.

Interest rates

Politics, banks, and the global economy can all influence the real estate market when it comes to interest rates. The real estate and financial crash proved the global impact of the real estate market and increased awareness of how interest rates and loans are used in home buying. If things aren’t looking good abroad, it might affect your ability to sell homes domestically. Keep an eye on what’s happening in the global market and with foreign investment as these play large roles into the expectations of the local market as well.

Remember, banks are in business to lend, and today unlike their troubled counterparts in other parts of the world, they have good balance sheets and plenty of money available. So what’s with the apparent reluctance to open the money spigot? Remove your negative emotions towards these much maligned and penalized institutions for a moment and look from their side of the ledger. In today’s world of low interest rates and a flat yield curve a bank has less than a 3 percent net interest margin, which is the amount between what it pays depositors and what it makes on loan rates. The very best possible outcome on a loan for our forever criticized, highly regulated bank is to get paid back all its principal and make a small spread on the interest. Get paid back 95% of every loan and it goes broke. Careful scrutiny of any type of loan is judicious business practice and necessary to remain solvent. A top quality financial lending institution can be lucky to earn is 1 to 1.5 percent on assets historically.

Certain factors have the greatest impact on what lending rate a consumer will receive. Start with the general level of interest rates in the national economy, which is influenced by actions of the U.S. Federal Reserve Bank, levels of inflation, demand for borrowing money, the stock market, and a number of other factors.

Then you get to the factors for your home loan, the lending rate is influenced by the amount borrowed, what kind of loan you get, and whether you put up collateral or not. For instance, the interest rates on a home equity loan (where you use your home as collateral) are generally less than for unsecured credit. The term of the loan — how long you take to pay the money back. Even a small difference in your interest rate can have a big impact on the amount you eventually pay, so it’s worth understanding how interest rates are determined and what you can do to lower yours.

While lenders control who gets approved for a loan and on what terms, actual mortgage interest rates are largely determined on the secondary market, where mortgages are bought and sold. As with the stock market, interest rates in the secondary market tend to move up and down. When the economy is on an upswing, investors demand higher yields, forcing lenders to raise mortgage rates. In a market downturn, rates tend to drop for consumers because of increased investor demand.

While home or real estate sellers hope to get top dollar for their property – and some have an inflated idea of what to expect – establishing value can be a complex, multifaceted process.

Location

Most consumers know that the three rules of real estate are “location, location, and location”. Location includes factors such as the price and availability of recent nearby transactions and inventory, the quality and desirability of local schools, and whether the area has the lifestyle and community buyer’s seek.

What does location mean, it is more than closeness to the center of the community; does it have the qualities of a dwindling asset? Location encompasses many other considerations. Waterfront of most types is limited in any scenario, but particularly in our Texas metros. Those that have it, will demand and get a higher value / return than similar properties not on the water. What type of view? What’s it next to? Is it near retail establishments? Or a highway?

With location comes school district. The Voice covered this almost a year ago Oct. 18, 2013 with “The effect of school performance on local home prices.” The school district or even a specific school within a district can drive demand for a particular area. Ask any real estate agent you know and they will confirm that having strong schools and an overall strong district can affect home prices by as much as 10 percent over a neighboring district.

Your family doesn’t have kids of school age? Buying a home in a good school district is still smart. When the schools are desirable, homes tend to hold their value better in down markets and appreciate more in good times. A 1 percent, 2 percent, or even 3 percent difference in a home’s value can be thousands of dollars. I educate people all the time, ‘You need to look at supporting and maintaining a good school district much like you would the maintenance of the roof or siding on your house.’ Why? Both will significantly affect the value of your home. Whenever a school tax increase comes up for a vote, my thought process is it seems like a pretty small price to protect the value of your investment.

This just scratches the surface of the factors affecting real estate values. Understand that in our Texas markets, the home you look at today will be gone tomorrow. Investment property in the Texas region, particularly in any of our metros if priced correctly will sell quickly. Educate yourself with your financial planner and real estate professional on what you are looking for and the history of the neighborhood. If you think you will have plenty of time to do this after the purchase, guess again. It is a sellers market, meaning the seller decides many of the terms of purchase, which may not allow the buyer much time to analyze after the purchase.

What’s the best investment? Start with sitting down with a financial planner, real estate professional, and if financing is needed, a mortgage professional. Actually I would probably reverse the order in today’s harsher lending environment. The size and scale of the current and historical real estate market make it an attractive and lucrative market for many investors. Investors can invest directly in physical real estate (this analysts preferred method) or choose to invest indirectly through managed funds. Investing directly in real estate involves purchasing the residential or commercial property to use as an income-producing property or for resale at a future time. Indirect ways to invest in the real estate market include investing in real estate investment trusts (REITs), real estate exchange traded funds (ETFs), commingled real estate funds (CREFs), and infrastructure funds. Again this is a decision you and your family and your real estate and financial experts need to make together.

There are many factors that play a significant role in moving the real estate market, but there are also more complex parts that come in to play. And although some of these aforementioned factors suggest a clear-cut relationship between the factor and the market, in practice, the results can be very different. However, understanding the key factors that drive the real estate market is essential to performing a comprehensive analysis of a potential investment.

If you have the assets and capabilities, there is not a better time to invest than now. Lending rates are the second lowest they have been in the last 100 to 5000 years. Seriously. Values have maintained in Texas during the worst recession in my memory. Six years is the longest positive market we have had in Texas over the last 50 years. We are 2.5 year into this positive run. Other than a catastrophic economic event, your investment in Texas real estate should have a good run for 10 years are more.

Is Texas overvalued?

Last week, the media picked up an article by one of the major real estate media outlets on the ‘overvalued’ Texas metros real estate.

The real estate and financial collapse of the last decade — a once-in-a-century financial crisis and recession — is not something most folks are excited to see repeated. Many parameters since the crash have been put in place to discourage another bubble and crash. Mortgage lending is tremendously harsher than it was 10 years ago, potentially excluding 3 to 7% of the total market from qualifying for home mortgages.

The housing market nationally is at about 40 to 50% of production / sales of where it was pre-recession. The last couple of years have been healthier, with Texas real estate in 2012-13 really showing strength.

Yet, after the real estate bubble, when any ‘hard asset’ market shows strength, the naysayers seem to take delight in looking for the next bubble collapse, whether it is in gold, stocks, Bitcoin, real estate, etc. I am not well versed in many of these, but know well the history, demand, and forecast of the Texas economy, having watched and participated in it over the last fifty years.

After a number of years of declining or stagnating housing prices, the market turned around big time in 2012-13, making some analysts and naysayers worry that we’re seeing the beginnings of Housing Bubble 2.0. The concern for housing bubbles is real, wherever you live.

However, there is a long way to go before the regional market begins to show those signs. Here in Texas we are not seeing this based on economics 101 – supply and demand. Are we overvalued? No. I am sure that if you delve deep enough into all the regional properties available, there are some that are overvalued. But as an overall market this is not true.

For those who are not familiar with the Texas’s history during the recession, it came out fairly unscathed with real estate values and employment leading the nation. During the bubble years when the sand states (California, Nevada, Arizona, and Florida) were leading the nation in appreciation (40+% annual), Texas was near dead last in home price appreciation, with less than 3% annual appreciation for a number of years. Texas was 50th in appreciation for a couple of years. We may have climbed up to 47th or so, but the runaway real estate speculation of the bubble states was just not available here to those looking for a ‘quick buck’.

Methodology

So to the point I am addressing, one of the major real estate media sources has named a number of our Texas region metros as ‘bubble markets’ to watch. Their basis is on tracking home prices across the country to see which markets are over and undervalued. In a forthcoming “Bubble Watch” report, they find that while most of the U.S. real estate market remains significantly undervalued, there are certain markets that feel are straying into bubble territory.

Realize that they are a media source, not a real estate broker. They are a very knowledgeable source but they make their money on advertising rather than real estate investment. We have a great deal of respect for the chief economist and his findings, but to call Austin and the other regional markets overvalued? Compared to what? You cannot compare to history, Texas and Austin appreciation has been one of the lowest in the country over the last 10 years. Check with the national sources such as OFHEO, FHFA, or Corelogic index.

Their methodology looks at whether home prices are overvalued or undervalued relative to their fundamental value by comparing prices today with historical prices, incomes, and rents. The more prices are overvalued relative to fundamentals, the closer they feel we are to a housing bubble – and the bigger the risk of a future price crash. By their own admission, ‘Recent price changes, by themselves, cannot tell us whether this is a housing bubble; neither can a simple comparison of nominal price levels today to where they were in the past.“

They then combine these various measures of value rather than relying on a single factor, because no one measure is perfect. In doing that markets in California, Orange county and Los Angeles are more than 10% overvalued. But where I argue is that they also showed the Austin, Texas market at 10% overvalued, while 7 other markets range from 4% to 7% overvalued. Those include:

• San Antonio, TX;
• Honolulu, HI;
• San Francisco, CA;
• Houston, TX;
• Riverside-San Bernandino, CA
• Oakland, CA

Unsurprisingly, these markets are where job creation has lead the nation, in Texas and California, which have also seen double digit home appreciation over the past year, with Orange County real estate appreciating a strong 23.4% since October of 2012.

So are we in danger of another housing bubble like we experienced last decade? Not quite yet, at least nationally. We cannot comment on those markets outside of Texas. According to their data, the national market remains roughly 4% undervalued overall. And in some markets, like Cleveland, Ohio and Palm Bay-Melborne-Titusville, Florida, home prices are still 20% below their fundamental value yet they do not have the employment growth or demand of the Texas region. Furthermore, even the most frothy markets are less overvalued than the national market was in 2004, when home prices were 24% overvalued nationally.

Starting with residential home values, Austin, San Antonio, D/FW and Houston metros are still challenged in inventory with all having less than 6 months inventory. Analysts at Texas A&M Real Estate Center will tell you that 6 months worth of inventory is equilibrium. Below that it becomes a seller’s market (a market where lack of inventory makes values improve). Above that mark of 6 months, supply dictates an easing of values, making it more of a buyer’s market. So based on demand and supply this market does not seem to be overvalued presently and with current absorption and employment projections, it will be 2 to 3 years at least before this could become an issue.

Looking at residential rental, the market demand currently has been outstripping demand for the last 2 to 3 years, even with near record supply of apartments being built in all Texas metros. Supply at some point should outstrip demand, right? It may happen soon in Austin, San Antonio or D/FW based on current construction. But demand has outstripped supply as shown by the lack of concessions or lower occupancy. Rental values over the last 10 years have appreciated over 50% with home values around 35%. Demand has kept values strong.

One of the things to keep in mind about current demand vs. prerecession is that the non-30 straight rate, 5% to 10% down programs that are prevalent now, were in the minority pre-recession when sales, values, appreciation, and speculation were stronger. The ability to have a bubble in real estate is more restrictive now.

Overvalue is overstated presently in the local regional markets. In other words, the real estate and financial world has changed. Younger families are unable to qualify. Young people have not gotten the economic traction since the recession. Even the ones who can aren’t getting mortgages because credit is much tighter than it was in the pre-bubble years, and recent price increases have been fueled by over-enthusiastic investors rather than true economy-wide demand for housing. Every real estate analyst is forced to used assumptions when forecasting the future prices of homes, and given the fact that home price appreciation in Texas has been healthy for a couple of years, may be going too far in arguing that certain Texas metro markets are overvalued bringing thoughts of another bubble.
Let’s look at appreciation from another source: Corelogic, an analytics company with lots of data. When you look at the following chart you can see that a number of states have had stronger appreciation than the Texas region.

voice graph 1 10-10

Another chart shows annual metro appreciation and supports the same conclusion of good appreciation, but not overvalued.

voice graph 10-10

Texas metros are not overvalued

In all Texas metros demand is outstripping supply and the entitlement and lending process have a way of governing development and building. Will Texas and it metros overdevelop and build in the future? Absolutely, the advantage of a free market is the ability to market real estate if you can get the financing. the market dictates whether the market is overbuilt or not. The market has a way of self correcting. All of our metros seem to be a few years away from slowing. Austin, which led the list of overvalued markets in Texas, has the longest entitlement process of approval, meaning supply will take a while to catch up to demand.

It’s still cheaper to buy than rent. If you live in a metropolitan area, it may make more financial sense to buy a home than rent a house, condo, or apartment. According to a to this same real estate media source study, buying a home is 44 percent cheaper than renting in the 100 largest metro areas in the United States. While this data was calculated based on last year’s lower mortgage rates, there is still a significant price difference in total monthly costs with today’s rates. And again income vs. home value is tremendously better in Texas than almost any other state that is creating jobs.

Comparatively, home prices are relatively low. Housing price trends vary significantly by location and even by neighborhood, but the average housing price trends across the country look promising for prospective homebuyers looking at Texas versus their current state. The S&P/Case-Shiller composite index of 20 metropolitan areas increased only 1 percent this past season, so 2014/15 could still be a great time to buy.

Because of the lack of dramatic appreciation, there is less competition from home flippers. Housing prices in some markets are increasing, making house flipping attractive. But in Texas it has historically been a lower appreciation value. This gives prospective homebuyers more inventory to choose from and the benefit of having less pressure to close a deal because of another pending offer. This could be the time to enjoy the freedom of shopping around for that perfect home and making an offer.

The majority of renters would like to avoid the cost of rising rent. A buyer’s market means it might be time to say goodbye to renting for good, but Texas is a seller’s market. That said, rent increases historically go up quicker than appreciation. So as you look at shrinking housing dollars at your current location or want to move but will experience a spike in rent, consider the benefits of buying a home instead. You may be able to secure a great rate with your credit history and end up paying the equivalent or less in monthly payments as you build equity in a home. Renting can be a more affordable option for the short term, but renters still have to face rising rental costs year after year.

Presently with Texas real estate being undervalued, there is not a more affordable time to buy. Buying a home gives you a chance to start building equity, and you are investing in your future. Even if you end up selling your home in five or ten years, you could profit from the sale and invest that money elsewhere. If you’ve been dealing with rising rent or the hassles of costly moves for the past few years, settling in to a home can stabilize your housing expenses – especially if you get a fixed-rate loan at a great rate. You won’t have to worry about your monthly housing expenses changing significantly for a few years, and you will pay for something that has more value than a rental property. Consider the benefits of making this type of contribution to your future month after month. Of all the regional markets, look what region has had consistent growth over the last 10 years. Not necessarily explosive appreciation, but affordable. Now is the time to buy in Texas!

One of the enduring lessons of the last real estate bubble is that while there are many reasons to buy a house — like the tax-deductibility of mortgage debt, the forced savings mechanism of paying a mortgage, and the pride of homeownership — expecting unrealistic significant appreciation in your home’s value shouldn’t be one of them. If you are looking at the value or your home / real estate it is more important to look at the last 5 to 10 years history to decide if it is overvalued. Looking at a snapshot, is just that; a partial picture of the total.

Investing in real estate

Now may be an excellent time to make a real estate investment, particularly in Texas. We have seen strong rental value appreciation over the last three years in all five major Texas metros, but particularly in Austin and Houston, where over the last ten years we have seen a 60+% increase in rental rates. This is much stronger than value appreciation and wages over the same time period. Maybe the bigger question from investors, is “Will values hold?” Based on current demand and inventory in all metros, I say yes.

We buy property in hopes that our investment will generate some kind of return down the road. The chance of that occurring is very low if one does not hold the investment for at least five or more years. The reason is that transaction costs, repairs, monthly ownership costs higher than comparable rent, and ownership hassles dictate that it is better to invest your money elsewhere and stay as a renter if you are not sure you will own long term. Therefore, since you are going to be a long-term holder (the longer the better) you really should not be that concerned with short-term market price fluctuations. Even during the recession this was true, if you looked at real estate investment from a longer hold period, such as ten years plus.

Nationally we have seen a slowdown of the large investor funds, known to many as vultures because they swoop in and buy “distressed properties” — foreclosures and short sales – cheap. Other parts of the country experienced this, places like Las Vegas, Chicago, Phoenix, Atlanta, and Miami were popular because home prices there dropped as much as 70% at the bottom of the market.

We aren’t seeing this kind of investment strategy in Texas. We never saw the run up of values like those other markets did. Therefore its difficult to profit on flipping/speculating on the housing market in Austin. Are we seeing the vulture groups? Again, not really. What we are seeing is true real estate investors who are looking long term. Once they analyzed their decisions based on home-price appreciation, which is very speculative. Now they consider potential rental profits, which are far more stable.

When planning a residential real estate investment, do not even factor in price appreciation for at least a year. After that, calculate only a 3% annual increase or less — a return that won’t turn heads of investors who only want to buy low and sell high. Look for cash flow. Know that you will have to put 20% to 30% down on the investor loans. At today’s low interest rates, they’ll get a near 5% loan, 20% down. Figure another 10% of the price for property management (unless you like getting calls in the middle of the night to unstop toilets, etc.), 10% for maintenance, an 8% vacancy rate, plus taxes, insurance and other home ownership expenses.

Cash flow vs. appreciation

• Properties that appreciate quickly are generally in higher income areas (desirable) and generally don’t cash flow immediately. But, you should look to increase rents to cover your mortgage payments within a minimum of 12 to 24 months.
• How do you rate good opportunities? I start with costs (rates, values, rents) that are low, with some upside. Historical trends and history as well as potential conservative appreciation.
• Raw land is not going to have cash flow. As we have stated before, there is a limited number of developable lots. There has been limited funding (bank loans, etc.) for development. If more product is not coming on the market to compete, rents will increase – less supply, therefore values increase.

Although conditions are very favorable, investors have to be adaptable because the market is evolving rapidly. It’s the income from rentals that’s paramount right now. The beauty of cash flow, of course, is that even if prices declined 10% or 20%, the investors should be able to live with that. Investing in rental properties is a long term investment strategy. You need to look at a minimum of five years to hold. As always, you need to visit with your CPA, financial consultant, mortgage professional, and real estate professional before you dive in.

What do I look for in real estate? I look for an investment almost like dating or getting married. You should be concerned about finding an investment that you “love”— one that fits all the right reasons. Once you invest, that investment will be part of your family and financial planning for a long time! If you are looking for a ‘quick fling’ in real estate, I would look at other investments. Real estate investment typically is a long term play.

What things should you look for?

• Location, location, location. First rule of real estate.
• School district and schools are paramount after that in all price points. The higher the demand for the schools in the area, the higher the rent and value.
• Jobs! Long-term strong employment is what you want in your metro. Without jobs, demand is less, and your rental property may go vacant.
• What type of investment are you comfortable with? Do you need cash flow immediately? Is leverage important? The answer is typically yes, but be careful, should the market shift negatively, you do not want to be overleveraged or ‘underwater’ on amount borrowed vs. value.
• For experienced investors, most expect less than 5% appreciation and look for positive cash flow from day one. With today’s current values in Texas, most residential rentals are able to achieve positive cash flow.
• It is fairly priced relative to the recent comparable sales in the immediate area for similar properties? Look at values over the last 5 to 10 years in the area.
• Vacancy isn’t too high in the area. This is very important whether an owner occupant or investor. Empty unstable neighborhoods or communities have a higher risk of vandalism and risk downward price spirals. A lot of times this is a byproduct of neighborhood schools.
• It is in decent shape and doesn’t need much fixing-up. Skip the massive fixer uppers, the ones with foundation issues, or anything labeled as “needs a little TLC” in the listing, as that means it is a wreck. Leave the fixers for the contractors, they know what they are doing….. doing it yourself doesn’t usually save you much money.
• If there are big vacant parcels question the use. A non-residential zoned parcel, empty or retail/industrial/etc. site where you are not 100 percent sure what is going to be built there could affect your values later on. Confirmation of use is the best insurance of protecting your investment. A new use of that land could impact your “quiet enjoyment” of your residential rental unit.
• You complete the proper due diligence steps to reduce your risk as much as possible. Mind your contract terms and contingencies, pencil out your deal, get a couple of bids on financing and dissect your GFE, review the HOA condition, review the property condition, make sure you have the right type and amount of property insurance in place, make sure you adequately review the title abstract and title policy and everything else you need to do to lower your risk.
• Affordability! Record low rates and stable values in most Texas metros compared to the rest of the nation makes this one of the best buying opportunities consumers have seen in years.

History is a great teacher, however the last seven years were an anomaly in real estate investment. If you bought at the bottom, good for you. Those type of discounted investments only come along once or twice in a lifetime. If you are going to buy, look to the above suggestions. Get with the professionals and listen. Find a mentor that has done this before. Find a house you love or rental property that makes sense, that you will own for a long time, is in decent shape, lock in long term financing, and sleep well.

Even strong markets can have negative equity

An article was published in the Austin Business Journal recently stating that even in Austin’s record strong real estate market, some homeowners still have negative equity – 8.1% in Travis County, 8.6% in Williamson, and 10-11% in Hays and Bastrop counties. How can this be in some of the best markets in the nation? Shouldn’t there be no negative equity in a good market?

When I first got into real estate in the mid 70’s, the average tenure of home ownership was 3 to 5 years, at which point the homeowner moved up. That has changed dramatically during the bubble and recession. Most surveys will show that most homeowners have owned their home 11-13 years before selling. Now that I think about it more, 11-13 years is not a very long time compared to the duration of homeownership by my grandparents. They held one of their properties for over forty years! In that time period, its value went up by 20X and the mortgage was paid off within the first 20 years. Lots of bad things happened in the past 40 years and the property still went up by 2000%. Talk about resiliency and the power of inflation.

The secret to property wealth creation is to just hold on for as long as possible. A 20+ year holding period smoothes out all the volatility. Any thoughts of negative equity are long gone. According to the US Census Bureau, the average time that a person lives in a home they bought is 13.3 years.

In all of our Texas markets we went back to 2000 to look median home values to answer not only the negative equity question, but what average appreciation has been in that same time period.

Yearly Appreciation for Texas Metros

Charting the Texas metros over the last ten years shows a healthy increase long term. More importantly it shows the health of the regional market with no strong negative deviations during the recession. Each metro has had comfortable but not crazy appreciation, which in my eyes is preferable. Texas has been blessed not to have any of the 45+% price swings the bubble states had (CA, FL, NV, AZ, etc). Single digit appreciation keeps speculators and short term investors from dominating sales.

median home price voice

Homeowners who think of their home as shelter may not be much bothered by negative equity. As long as they make their monthly payments, they can continue to live in the house, just as if they were tenants. But homeowners with an investor mentality are looking to a future in which they build equity. For them, negative equity is an emotional burden until they rid themselves of it, and it can turn into a curse.

Less than 10 percent of Travis County homeowners owe more on their homes than they’re worth. Nearly 11 percent of homeowners in Bastrop County are underwater. Ten percent of Hays County homeowners are underwater. Williamson County has about 8.6 percent of homes tied to mortgages that exceed their value. All the Texas metros fall into this percentage of about 10% of any given market. Again based on the data, of those homeowners with negative equity, over 50% are underwater between 1 percent and 20 percent. A small number, but alarming if you take the information at face value.

If we review the suggested cumulative amount of negative equity in Austin is about $2.1 billion. Again this is about 10% of the housing market in Central Texas. To put it in perspective, the negative equity rate across the country is 18.8 percent or 9.7 million homeowners. In Las Vegas nearly 34 percent of homeowners are underwater.’

Let’s go back to the original question – can a strong market have negative equity? The answer is yes, no matter how healthy the market is. Any hard asset historically cannot be sold immediately for a strong profit due to the costs of selling again. When you or I buy a home or investment property the thought process is to hold for a number of years, primarily because we know that home cannot achieve enough positive equity without an acceptable hold period. And as stated above there are always extraneous reasons that can cause mortgage default also. The other issue is financing. Should a borrower have higher leverage, the ability to recover equity in a quick manner is hard due to the higher borrowing costs.

New homeowners in production neighborhoods are underwater for the first few years due to financing. Is this a nick against production neighborhoods? No! Historically the consumer will pursue the easiest path of resistance and leverage. Location and quality of product also are part of the equation, and that is where new homes fulfill a need. This has been happening for years historically so I don’t see it as an issue.

Most of this is occurring in newer suburban outer rim neighborhoods, particularly at entry level, $150K to 250K. Why? The entry level consumer adds on so many things and is historically highly leveraged, so until the builder is out of the neighborhood for 3 to 5 years, most of those homeowners are underwater. The good news for most of these consumers is that they build equity and sell at a profit historically.

This is what Realtytrac (a foreclosure database) shows for Austin, the majority are entry-level. All Texas metros follow the same behavior.

foreclosure voice

What should underwater homeowners do? If you’re only a little bit underwater, maybe by a couple of percent or two, you might do nothing. In fact, most people who are underwater at the moment are basically continuing to pay their mortgage because they feel that this is the house they want to live in, they can afford to pay their mortgage, they have their income coming in, so there’s really no behavioral change, and most importantly they see the light at the end of the tunnel towards positive equity. It’s only when you reach deeper levels of negative equity that people start to think about choices around things like “strategic default,” for example.

What is a strategic default, and what are the conditions that make a homeowner more likely to strategically default? Simply put, strategic default is when someone willingly stops making their mortgage payments and goes into default even though they can afford to continue to make those payments. And there are two primary factors that drive strategic default based upon the research studies that have been done over the last couple of years.

One is, obviously, negative equity, and it’s not just being underwater, but being deeply underwater. And most of the data suggest that deep negative equity is somewhere around 125 to 130 percent—so being more than 30 percent below your mortgage amount—that people start to really consider whether or not it’s worth continuing to make that mortgage payment.

The second is whether or not it’s an owner-occupied or an investor home. Obviously, if you live in the house, and it’s your own home, the decision is much harder than if it is an investment property of yours.

The above scenarios historically and presently in our region are nonexistent. It’s mostly concentrated in the states that had big housing bubbles. So, we’re talking about markets in Florida, Nevada, Arizona, and California. It’s also generally focused on exurban areas of large metropolitan areas, so the farther-flung suburbs are often places where you find lots of negative equity. People who bought new homes in those exurban areas, generally, during the bubble years are much more susceptible than those who bought homes in the ’80s and ’90s, for example.

Presently negative equity is slowly decreasing. It is declining not necessarily because of house price appreciation, which we don’t see at the moment in most major metropolitan areas, but actually due to foreclosures and less foreclosures. Foreclosed properties are often ones who are underwater and so, as foreclosures happen, negative equity is reduced. So, it’s reducing, I guess, is a good thing, but not necessarily for the best reason.

If we look historically, what is the normal for negative equity? Most analysts never really tracked a long-time series of negative equity in large part because it’s never really been a pressing national problem in the real estate industry until the decline in prices during the recession. But, we went back recently to 2006 with the national data, and a little over a million people were underwater in 2006, as compared to 10.7 million now. At the height of the recession nationally it was just under 25% of all mortgages. So, even then, when house prices were running up, there were still a fair number of individuals who were underwater. Of course, at that time in particular, people could leverage themselves highly. So you had folks who were getting 110 or 125 percent financing going into the sale in the first place.

Real estate is local, so adopting a national or regional standard for a ‘normal’ underwater equity is not easy or healthy. But again if you look at historical numbers a healthy market should have somewhere between 5% to 10% negative equity. The good news is that the vast majority of the homeowners are looking long term at their investment where steady equity appreciation is present.

So, the negative equity story locally and regionally is not something to worry about.

Remember that homes and real estate are still undervalued, but appreciating. If you are planning to buy or sell, ask your real estate professional to run numbers for your local neighborhood. To rely on a national or regional number is a disservice to your home investment. Values vary greatly across any metro. The good news is the majority of Texas is positive.

What is the bottom line? Home prices are slowly recovering locally, regionally as well as nationally. Sales of both existing homes as well as new construction homes are improving. More people are moving into apartments and are likely to purchase a house, especially as the job market continues to gain ground. And fewer are losing their homes to foreclosure. The housing market is showing long term improvement, although some metrics (home values) look rosier than others (employment, new construction). The recovery isn’t a neat straight line. Instead, it is a messy picture of many variables that together show the economy and real estate markets are improving.

Texas grows while nation lags

We live in confusing economic times. Here in Texas, it is apparent that the recession is over and the economy is recovering. Most regional economic indicators have been positive for a while. The national picture is not as clear, as the media is fond of pointing out. Let’s look at the facts.

Whether you live in Austin, San Antonio, Houston, or DFW, in Texas, the economy seems to be on the upswing. Evidence can probably be found on the street where you live; it’s the “sold” sign planted in the neighbor’s yard. It’s the lack of rentals available. It’s low unemployment. If that wasn’t enough there is all the evidence that rents and employment will continue to increase in most of our Texas metros as more people move to Texas.

Elsewhere, many are not happy with the speed of the recovery. Nationally most talk about the lack of momentum. Let’s look at the national economic indicators and compare to the regional.
After such a visible economic change in 2013, so far this year most housing metrics outside of Texas seem to have disappointed expectations. Though the severe winter throughout much of North America has restrained some housing activity, nonetheless, there is an absence of underlying consumer momentum this spring, perhaps due to buyer sensitivity (sticker shock) to home prices and finance rates and the slowing of job growth at year end.

In the years since the Great Recession ended, millions of Americans who have gone without jobs or raises have found themselves wondering something about the economic recovery: is this as good as it gets? Nationally, it increasingly looks that way.

Three straight weak job reports have raised doubts about economists’ predictions of breakout growth in 2014. Just 113,000 jobs were added in January. In December, employers had added a puny 75,000. Job creation for the past two months is roughly half its average for the past two years. February’s lack of movement off of 6.7% unemployment is disappointing nationally, and further dims hopes for a breakout year.

Many point to the global economy showing signs of slowing. Global manufacturing has slumped. Fewer people are signing contracts to buy homes. Global markets have sunk as anxiety has gripped developing nations.

Only a few weeks ago, at least the short-term view looked brighter. Entering 2014, many economists predicted growth would top 3 percent for the first time since 2005. That pace would bring the U.S. economy near its average post-World War II annual growth rate. Some of the expected improvement would come from the government exerting less drag on the economy this year after slashing spending and raising taxes in 2013.

In addition, steady job gains dating back to 2010 should unleash more consumer spending. Each of the 7.8 million jobs that have been added provided income to someone who previously had little or none. And since 70%+ of the economy flows from consumers, their increased spending would be expected to drive stronger hiring and growth.

Growth of real gross domestic product (GDP) slowed in the first quarter to a disappointing .1%, following an average gain of 3.1% in the prior three quarters. The loss of business momentum in the early months of the year is attributed to poor weather conditions, but there may be more to that than what is seen at first glance.

Texas vs. everyone else

Nationally, a rebound in auto sales, an improved factory sector survey, and a pickup in hiring during March confirmed that weather played a role in holding back growth, and a turnaround in economic activity is highly likely later in the year. Overall economic fundamentals remain supportive of 3.0% economic growth during the rest of the year.

Here in Texas, vehicle sales are approaching pre-recession records. The Dallas Federal Reserve report on manufacturing shows optimism and continued improvement, a bit stronger than what is happening nationally.

One of the telling signs of the strength of our national economy is consumer confidence. A healthy attitude about the economy is typically somewhere above 90. The U.S. consumer confidence index was 82.3 in March 2014, up 5.1 percent from February 2014, and 33.0 percent higher than one year ago.

In comparison the Texas region’s consumer confidence index was a healthy 109.2 in March 2014, down 2.8 percent from February 2014, but 21.2 percent higher than one year ago.

Sales and construction of homes are sending mixed signals. Nationally, the January-February average of new home sales was flat compared with the fourth quarter performance. Regionally and locally residential markets continued to be strong in all Texas metros, with stories of multiple offers on most sales. Nationally, sales of existing homes have been trending down since August 2013, which is not true locally. Construction of new homes slipped in the early part of the year, partly due to bad weather. Locally and regionally builders cannot keep up with demand. The Mortgage Purchase Index of the Mortgage Bankers Association recovered in March after a drop in February, implying that an increase in homes sales is around the corner. Most analysts, economists, as well as the Fed are watching the housing market closely to ascertain if there is more than weather at play.

Business inventories remain a wild card after a consistent accumulation for the first three quarters of 2013 nationally. Regionally, the Dallas Federal Reserve showed the continued strength of Texas output and inventories. The January-February inventories data do not point to a large decline in the first quarter; the timing of a correction after a big buildup of inventories is always a challenge to predict.

In March, the national unemployment rate (6.7%) held steady despite an increase in hiring because the participation rate moved up, a positive development. But again, private sector payroll employment exceeds the peak seen in 2007. The latest labor market turnover report shows that the number of job openings in February was the highest level since January 2008. The strengthening of labor market conditions allows the Fed to complete the reduction in asset purchases by October 2014.

One of the major factors of the economy not gaining traction is shown in the BLS chart below. Private industry is hiring, but nationally the hiring has been primarily in the lower paying jobs. While government jobs have not gotten back to prerecession numbers, nationally the jobs created have not filled the jobs lost.

voice graph 5-2

Texas unemployment continues to shine with the state’s unemployment at 5.5%, Austin at 4.5%, San Antonio 5.2%, Houston 5.2%, and Dallas / Fort Worth at 5.6%. More importantly, job creation has been positive across almost all income levels.

Searching for 3% growth

In looking at economic growth, most analysts look at a dividing line between a slow-growth economy that is not satisfactory and above-trend growth with a tide strong enough to lift all and put people back to work. That number is 3 percent. The recovery had appeared to achieve a breakthrough in the final quarter of 2013. The economy grew at an annual pace of 3.2 percent last quarter. Leading the upswing was a 3.3 percent surge in the rate of consumer spending, which had been slack for much of the recovery partly because of high debt loads and stagnant pay. Then the first quarter of 2014 showed dramatic slowing of the national economy. Which is it? We will have to wait and hope for the best.

Most economists are looking for the national economy to expand 2.7 percent in 2017 before declining to an average of 2.2 percent through 2024. That’s about as sluggish as the current recovery has been, on average, so far. Regionally and locally the expectations are above 3% sustained through 2020. A sign of the major difference in the regional economy vs. national.

An economy that grows faster than 3 percent would make it easier for the 3.6 million other Americans who have gone without a job for more than six months to find work. The weakness of the recovery stems in part from the usual lingering hangover from financial crises. Historically, research shows that it takes a decade plus to fully heal and achieve previous highs in growth and production. Remember no financial crisis has seen immediate reversal. It takes time. The good news is that financial crises do not last forever. A decade is a long time. But a long time is not the same as forever.

That may not match how people in Texas or a handful of big, prosperous cities see things. After a disastrous and historic crash, housing is booming in places like San Francisco and New York. Bidding wars are back, and the question is not whether the real estate market is recovering but whether new bubbles are forming or is the market just playing catch up.

Except in a few booming markets, residential and commercial construction are nowhere close to pulling their traditional economic weight. Consider this: investment in residential property remains a smaller share of the overall economy than at any time since World War II, contributing less to growth than it did even in previous steep downturns in the early 1980s, when mortgage rates hit 20 percent, or the early 1990s, when hundreds of mortgage lenders failed.

If building activity returned merely to its postwar average proportion of the economy, growth would jump this year to a booming, 1990s-like level of 4 percent, from today’s mediocre 2-plus percent. The additional building, renovating, and selling of homes would add about 1.5 million jobs and knock about a percentage point off the unemployment rate, now (6.7%). That activity would close nearly 40 percent of the gap between America’s current weak economic state and full economic health.

Slow construction is holding the economy back

As we all know some areas of the country were way overbuilt, and in those markets buyers are still working through those supplies. Bank lending is only now easing for homebuilders, developers, and buyers. Here in Texas, even thought we had the demand, construction and acquisition equity is just beginning to become active. Locally and nationally those restraining factors have eased a lot in the last few years. The bigger thing holding back housing is simply household formation and demand. Many people are delaying the need to fulfill the American dream of buying a house of their own.

It may yet prove to be temporary, but for now at least, millions more people are doubling up with roommates, living at home with parents, and otherwise finding ways to avoid doing the one thing that would get the housing economy back to normal: buying a home.

The number of new houses and apartments that are needed in the United States is determined over the long term largely by demographics — immigrants arriving and young people moving away from home. From 2000 to 2007, the number of households rose 1.24 million a year on average — about what economists would expect, given those demographic trends.

Add in the 300,000 or so homes that fall into disrepair each year and need to be replaced, and builders would have to construct around 1.5 million homes a year to keep up with long-term demand.
During the boom, builders were much busier than that, putting up 2.1 million more houses from 2000 to 2006 than if they had stuck to that 1.5 million trend rate.

But the correction underway since the housing bubble burst has been far more severe than the overbuilding that preceded it. From 2007 to 2013, builders constructed 4.8 million fewer homes than they would have had they kept to the trend rate. In fact, if the challenge was solely to work through the 2.1 million “extra” homes created during the boom, that concern should have been finished around the middle of 2010. A couple of things happened. Many of those homes were built speculatively for builders as well as buyers. in hindsight the market got ahead of itself in many markets namely, Nevada, California, Arizona, and Florida. 55% of foreclosures happened in 32 counties with in these states.

In my eyes this market will correct itself in time. History and demographics have shown that.

The good news is that looking at household formation on a local basis, the Texas metro markets cannot keep up with demand. All local markets are seeing strong value improvement as well as more people moving here than current housing inventory can give shelter to.

Based on the slow economic performance nationally in the first quarter of 2014, what will shape the housing market through the rest of 2014-15 locally?
• Not enough residential, commercial, office or retail space available. The lack of building and financing over the last six years has allowed rent and owner values to improve. Presently most local brokers, realtors, and builders will tell you of the need for inventory.

• 2014 transaction volume should increase modestly. Housing metrics should improve in 2014 due to faster economic growth, and continued job growth, despite somewhat higher interest rates, as well as more measured home price inflation. Single-family starts are projected to improve 10 to 15% to around 10,000 homes in Austin and San Antonio. Multifamily starts should slow as the market decides whether it is at a tipping point on apartments. Austin has over 36,000 under construction or in the pipeline, yet there has been little drop in occupancy and concessions on rentals are nonexistent, but bear watching. San Antonio has been a tad slower but still quite a few new apartment starts with over 10,000 this year. Both rental markets bear some watching.

Resales will bear watching because of the lack of inventory in all metros. Those sellers that are looking to sell, historically want to stay in Texas according to Gallup polls and historical data so resale inventory will have pressure on it due to immigrants into the state as well as those who live here presently.

• The attractive home, land, investment prices in our regional markets, low absolute mortgage rates, and a moderate rise in nominal incomes have driven improved affordability and valuations. Mortgage rates remain well below their historic averages, and housing pricing remains undervalued versus incomes.

• The local demand continues to be effected by narrowing of affordability, diminished but persistent lack of inventory, challenging mortgage-qualification standards and lot shortages. As noted in the past, the recovery will likely remain challenging.

A few reasons why the market will remain positive in 2014

With home and commercial real estate sales improving dramatically last year, then a slowdown at the first of this year, there seems to be conflicting opinions and information on the health of the housing market nationally as well as regionally. Is real estate back to stay or was last year an exception? Most positive economic runs, particularly in Texas, historically last no longer than 6 years, so many are on the bandwagon questioning whether the housing and real estate market is back or not.

What are the major concerns? Heightened bank and mortgage regulation will slow buying, but not demand. Many consumers are voicing concerns about the ability to purchase shelter that they can afford. Because of this demand, the other major concern seems to be that housing is suddenly becoming unaffordable and there is risk of another bubble.

First, aren’t these contradictory arguments? If demand is going to be stifled, then how can we have another bubble? After all, any asset bubble is defined by irrational exuberance as exhibited by excess demand. Isn’t the rule, you can’t have your cake and eat it too? Either demand is stifled or there is a bubble, but not both.

Instead, here are some things, which in my mind will keep the market positive this spring.

Availability of credit

Any asset market runs on the availability of credit for purchase and sometimes speculation. The housing market is no different; its heights have been achieved when credit was easy and ultimately unhealthy when the lax underwriting did not perform positively as the markets slowed. This was one of many reasons for the housing bubble and eventual financial crisis of 2008.

Most of us can’t buy a home or investment property without credit. Analysis of the credit profiles of recent purchase transactions tells us that the only real dimension in which credit availability is “tight” right now is with credit scores. Before the crash, many mortgages were underwritten with lower credit; about 10% of purchase originations had FICO credit scores below 620. In addition we saw many ‘subprime’ opportunities in the early 2000’s, with lower lending standards than previously, and with the pendulum swinging to the conservative side today.

At the moment with tighter credit, approximately 0.3% of purchase mortgage originations have credit scores below 620. In talking to local and regional lenders, there are good signs this spring. Some standards are relaxing as lenders are announcing reductions in minimum credit score requirements. Before you begin to gripe about the resurgence of the disastrous subprime loan, remember that lending to borrowers with lower credit scores can and has been done successfully in the past. The caution on lower credit scores is you don’t also layer additional risk on top such as payment shock and high leverage. As an analysis will show, the afore mentioned creates opportunity for speculation with little consistent underwriting. Always a formula for the highs of bubbles and the following credit crashes.

The good news for the remainder of the year is the potential of slow rise of interest rates and many lenders looking at making lower credit score mortgages to fuel their appetites. Rising interest rates should make getting a loan easier. Rising rates historically means lenders’ refinance business dwindles, forcing them to compete for buyers by potentially loosening their lending guidelines. In addition, credit unions and banks may be making it easier for some prospective buyers to qualify for a mortgage. Less stringent requirements and qualifying criteria may help some people finally get that home loan. If you have good credit and some savings available for a down payment, you might just be able to get a loan for your dream home this year.

Will rates stay low? Yes, but not as low as they’ve been. The rates we have seen recently are the second lowest rates have been in 5000+/- years. If the economy continues to heal they should rise. In 2014-15 the new Federal Reserve Chair Janet Yellen is expected to continue Ben Bernanke’s policy of keeping mortgage rates low by buying blocks of mortgage-backed securities, but the Fed’s bond-buying taper could push rates higher.

Pent-up demand and supply

With little to no development and homebuilding in the last 6+ years and the continued formation of households, there is pent up demand. Particularly in Texas, where we have seen all Texas metros improve with shorter times for listings on the market as well as improved appreciation over the last couple of years. Many current and prospective homebuyers are also first or second time home sellers. Even in the best of times, first-time homebuyers account for much less than half of home purchases. The existing homeowner who sells and then buys (called housing turnover as well as 80+% of most markets) is the backbone of the housing market. Yet, nationally, many markets are still under the value of their mortgage, meaning they’re underwater or have less than a 20% equity stake built up.

Negative equity peaked in December 2009 when more than 12 million mortgage homeowners nationally were underwater. Over the past four years, more than 5.5 million homeowners have regained equity, reducing their risk of foreclosure and unlocking pent-up supply in the housing market.

Through 2014-15 fewer homeowners will be underwater with the strength of the demand in the market. Rising values helped 2.5+ million homeowners with underwater mortgages regain positive equity status during the second half of 2013. By Q3, a CoreLogic report found that about 6.4 million (13.3% of all residential properties with a mortgage) homes were still in negative equity at the end of 2013. Watch for that number to shrink this year and next.

CoreLogic’s negative equity analysis showed nearly 6.5 million homes (13.3 % of all residential properties with a mortgage) were still in negative equity at the end of the fourth quarter report. In 2013 limited supply drove stronger price increases, and that could change as more sellers look to capture equity from their homes in 2014. Realtor.com notes that the inventory (homes available for purchase) shortage began to soften in February. New construction and rising prices should bring more homes, both new and old, on to the market in 2014, helping inventory return to traditional levels

The strong gains in home price appreciation in many of the hardest hit markets have created a healthier cycle though, relieving more homeowners’ higher debt than value situations and putting them in the position to become sellers and then buyers again in 2014-15.

Here in Texas, according to real estate research and brokerage firm Redfin (see chart below) our regional metros led the nation and have seen an increase in velocity of home sales over 2013, which in most of our regional markets was one of the best on record.

Voice graph 1

With the increase in demand nationally but more importantly here in Texas, metro home values will rise between 5% to 10% in all metros in 2014. For comparison’s sake, 2013 saw jumps nationally of 3% to 5%, with increases of more than 20% in some hot spots. These strong gains, while beneficial in many ways, are also unsustainable and well above historic norms for healthy, balanced markets. The markets that saw this aggressive double digit appreciation were also the sand states where values fell double digit annually also, unlike anywhere in the Texas region where last year was the first year of significant single digit appreciation. Towards the end of 2015, home value gains will slow down significantly because of higher mortgage rates, more expensive home prices, and more supply created by fewer underwater homeowners and more new construction.”

So are we in a bubble or not? Do most consumers really think that house prices won’t go down? Assuming that prices couldn’t go down was the foundational premise upon which speculators built the last bubble. If you believed in ever-rising prices, then it didn’t really matter whether the borrower was qualified. But most analysts are hard pressed to find anyone now who believes house prices can never fall, and rising rates and increasing supply will slow price appreciation over the coming months.
The days of financially engineered loans of ever-larger amounts, keeping pace with rising prices while holding monthly payments low, are a thing of the past. The lack of access to “unreasonable” credit should, alone, act as a governor of the risk of bubbles.

As we enter the spring buying season, talk of bubbles and affordability crisis is overblown, in my opinion. What really matters is good old-fashioned supply and demand. Expect more supply as the cycle of price appreciation unlocking pent-up supply continues. Expect increasing purchase originations as credit standards relax modestly and help to stimulate more demand. Rationally, most should feel exuberant about the housing market.

For a better explanation of what constitutes an asset bubble please visit our Independence Title blog entry from March 29,2013, “Is there a danger of a housing bubble in Texas?”

With the increase in values and rates, affordability will decline. Nationally, as well as locally income has not kept up with home prices even in a depressed market. A great example is Austin, where over the last 10 years; rents have escalated 58%, home values 38%, and wages less than 10% over the decade.

Despite the slower pace of price increases, home affordability will decline as mortgage rates rise. The real culprit is income levels, which aren’t keeping pace with the increases in housing costs. In 2013, the National Association of Realtors’ Home Affordability Index dropped to a five-year low. Experts predict the trend will continue through 2014-15.

voice graph 2

This said, one of the contributing factors to Texas growth is the ability to buy more home and have your pay check go further.

Nationally, because of the above mentioned factors, homeownership rates should fall below 65 percent for the first time since 1995. The housing bubble was fueled by easy lending standards and irrational expectations of home value appreciation, but it put a historically high number of American households – seven out of ten – in a home, if only temporarily. That homeownership level proved unsustainable and during the housing recession and recovery the homeownership rate has floated back down to a more normal level, and we expect it to break 65% for the first time since the mid-1990s. Watch also for adult children to move out of their parents’ homes, starting their own households, and further decreasing the overall homeownership rate.

Regionally, the ability to buy more house in most Texas metros should continue to be a motivating factor in those consumers who have been waiting to move to better opportunity.

So for the first time in a number of years, the Bureau of Labor Statistics is showing that more Americans will move where they can get more house and lower cost of living. The national trend of rising prices, a reversal of underwater mortgages, and easier credit will free Americans up to move. But next time they’ll choose smaller homes in more affordable locations. Most predictions will send Americans to less expensive hubs like Austin, Dallas, Houston, San Antonio, and less expensive metros.

Why Texas?

It’s still cheaper to buy than rent.

If you live in a metropolitan area, it may make more financial sense to buy a home than rent a house, condo, or apartment. According to a 2013 Trulia Trends study, buying a home is 44 percent cheaper than renting in the 100 largest metro areas in the United States. While this data was calculated based on last year’s lower mortgage rates, there is still a significant price difference in total monthly costs with today’s rates. And again income vs. home value is tremendously better in Texas than almost any other state that is creating jobs.

Comparatively, home prices are relatively low.

Housing price trends vary significantly by location and even by neighborhood, but the average housing price trends across the country look promising for prospective homebuyers looking at Texas versus their current state. The S&P/Case-Shiller composite index of 20 metropolitan areas increased only 1 percent this past season, so 2014 could still be a great time to buy.

Because of the lack of dramatic appreciation, there is less competition from home flippers.

Investors looking to buy and flip houses can’t move as quickly as they did in other market in Texas. Housing prices in some markets are increasing, making house flipping attractive. But in Texas it has historically been a lower appreciation value. This gives prospective homebuyers more inventory to choose from and the benefit of having less pressure to close a deal because of another pending offer. This could be the time to enjoy the freedom of shopping around for that perfect home and making an offer.

Avoid the cost of rising rent.

A buyer’s market means it might be time to say goodbye to renting for good, but Texas is a seller’s market. That said, rent increases historically go up quicker than appreciation. So as you look at shrinking housing dollars at your current location or want to move but will experience a spike in rent, consider the benefits of buying a home instead. You may be able to secure a great rate with your credit history and end up paying the equivalent or less in monthly payments as you build equity in a home. Renting can be a more affordable option for the short term, but renters still have to face rising rental costs year after year.

Force yourself to Invest in your future. Buying a home gives you a chance to start building equity, and you are investing in your future. Even if you end up selling your home in five or ten years, you could profit from the sale and invest that money elsewhere. If you’ve been dealing with rising rent or the hassles of costly moves for the past few years, settling in to a home can stabilize your housing expenses – especially if you get a fixed-rate loan at a great rate. You won’t have to worry about your monthly housing expenses changing significantly for a few years, and you will pay for something that has more value than a rental property. Consider the benefits of making this type of contribution to your future month after month.
Of all the regional markets, look what region has had consistent growth over the last 10 years. Not necessarily explosive appreciation, but affordable. Now is the time to buy in Texas!

Is now the time to invest in real estate?

Is now the time to invest in real estate? Have the glory days of the residential real estate investor passed? Low prices, rock-bottom interest rates and stable rental markets had created buying opportunities. Now, regionally, locally and nationally we are seeing the “long term” real estate investors (known to many as vultures because they swoop in and buy distressed properties cheap) are no longer making as big a splash. Does that mean that the opportunities for real estate investment have passed?

It would have been great if you had realized that the buying opportunity was 2-4 years ago. But it was hard to convince sophisticated investors how strong the local markets would be, much less neophyte investors. But in my eyes, the economic strength of job creation and lack of new product in high demand neighborhoods bodes well for local investors.

Continued distressed markets such as Las Vegas, Phoenix, Atlanta and Orlando and others continue to be popular even though the 70+% discount of the past few years is no longer available. Are we seeing this in Austin, San Antonio, Houston and our Texas metros? No, not as much. Why? Unlike other markets such as above, we never saw the run up of values (appreciation) like other markets did. Therefore it makes it hard to profit on “flipping”/speculating on the housing market in Austin. Are we seeing the vulture groups? Again, not really. We saw a little in DFW, but not the other Texas metro markets. What we are seeing are true real estate investors who are looking long term. Once, they analyzed their decisions based on home-price appreciation, which is very speculative. Now they consider potential rental profits, which is far more stable. But how they’re investing has changed. In the boom years, they would buy a property and flip it for quick cash out. Today, they are holding and renting for steady incomes. The new economy dictates that you have to have a long term view.

To underline the small appreciation on an annual basis in the Austin local market, below is a chart showing residential appreciation over the last 5 years.

4-4 graph

What should you look for? For example, do not even factor in home price appreciation for at least a year. After that, calculate only a 3% annual increase or less — a return that won’t turn heads of investors who only want to buy low and sell high. Look for cash flow. Know that you will have to put 20% to 30% down on the investor loans. At today’s low interest rates, they’ll get a near 5+% loan, 20% down. Figure another 10% of the price for property management (unless you like getting calls in the middle of the night to unstop toilets, etc.), 10% for maintenance, an 8% vacancy rate, plus taxes, insurance and other home ownership expenses.

What are you looking for? Cash flow vs. appreciation.

Generally properties that cash flow immediately come from “blue collar”, low income, lower priced areas. Many realtors would call them the ‘entry level’ buyer. Nationally as well as locally this buyer is not as able to purchase with current lending guidelines. Historically these areas appreciate, but not as fast as higher income areas.

Properties that appreciate more quickly are generally in higher income areas (desirable) and generally don’t cash flow immediately. But, you should look to increase rents to cover your mortgage payments within a minimum of 12 to 24 months. Both are good opportunities, but do it now while affordability costs (rates, values, rents) are low.

As we have stated before, there is a limited number of developable lots. There is limited funding (bank loans, etc.) for development. Those that are currently being built will take a while to get to the market. Why is this important? If more product is not coming on the market to compete, rents should stay high…economics 101 – less supply, therefore values increase. Although conditions are very favorable, investors have to be adaptable because the market is evolving rapidly. It’s the income from rentals that’s paramount right now. The beauty of cash flow, of course, is that even if the prices decline another 10% or 20%, the investors should be able to live with that. Investing in rental properties is a long term investment strategy. You need to look at a minimum of 5 years to hold. As always, you need to visit with your CPA, financial consultant, mortgage professional, and real estate professional before you dive in. Now is the time to buy investment property!

Why rates should increase and the housing market will improve

Milton Friedman once observed that low interest rates are an excellent indicator that inflation is low, so consumers wonder why economists keep predicting that inflation will rise. Short term, after this week’s Federal Reserve meeting, rates will remain low for a short while longer, hoping to encourage small and large business to expand and hire.

However let’s look at historical economic facts: low inflation does indeed lead to low interest rates, and vice versa, but the two don’t necessarily move in lock step. Often it takes a period of high interest rates (the result of Fed tightening) before inflation moves down and interest rates eventually follow. The early 1980s would be a great example of this. Similarly, it often takes a period of low interest rates (the result of Fed ease) before inflation pressures rise and interest rates eventually follow. The 1970s were a good example of how low interest rates can lead to higher inflation and higher rates. I think we’ve been in the latter kind of period for some time now. Milton also observed that the lags between monetary policy changes can be long and variable.

The consumer looks at today’s rates that are very low, adds in Milton’s observation about low rates and low inflation, and infers that inflation may actually be at risk of being so low as to threaten deflation. There’s a decent chance the market may not be reading things correctly and may be failing to learn the lessons of the past.

Historically, it is also the case that low interest rates can be a sign of a chronically weak economy, as Japan has suffered for decades. When investment opportunities are scarce, it doesn’t take much of an interest rate incentive to balance savings flows with investment demands for cash. This could be the reason why mortgage rates are so low and why so many continue to worry housing prices have not yet hit bottom: low mortgage rates could be signaling that there is a shortage of mortgage borrowers relative to the number of investors willing to buy MBS—thus, the demand for housing could fail to absorb all the housing supply that is due to hit the market over the next year or so as foreclosures allegedly pick up.

One needs to keep in mind, however, that there is no indication that the housing market is not improving or will soon fail to improve nationally (by improving I mean that sellers are able to find buyers at some price). According to the NAR, the monthly supply of unsold homes in the U.S. has fallen from a recession high of just over 11 months to now just under 9 months. Sales volume is up in many markets, particularly in California and Florida, and the Case-Shiller index of home prices in 20 major markets shows that prices have been flat to slightly up since early last year. Texas and Austin continue to lead the market.

The housing market is improving, and has been improving for over a year. Between declining mortgage rates and declining housing prices and a recovering economy, the market has found a price that equates buyers and sellers. The ongoing decline in mortgage rates is obviating the need for lower home prices. Think of it this way: the bond market, thanks to its conviction that the economy is going to be very weak for the foreseeable future, has been acting as a great shock absorber for the housing market by bringing mortgage rates down to all-time historic lows. In this view, low mortgage rates could be signaling simply that the market is very pessimistic about the economy, not that there is a shortage of homebuyers. Higher rates wouldn’t jeopardize the economy or the housing market, since they would signal rising confidence, stronger growth expectations, and the prospect of rising incomes and rising home prices. Higher rates would also be a sign of rising inflation expectations, and that would only add fuel to housing demand.

So we don’t see any reason to think that the recovery is fragile or that the housing market is on the verge of another collapse. Instead, we see lots of signs that consumers are concerned about the future of the economy. Those consumers with focus on their bottom line are out buying and financing at rates we won’t see again for a long time.

It’s getting better all the time

The majority of economists feel that the nation has turned the corner, according to a survey released by Bloomberg News. The U.S. Leading Economic Index rose 1% as of January 2014, a sign that indicates a lasting rebound. This latest report suggests steady growth this spring, but some uncertainties remain. Business caution and concern about unresolved Federal Budget battles persist, but the better-than-expected holiday season might point to sustained stronger demand and could put the U.S on a faster growth track for 2014.

The positive economic news of 2013 and the rising index of U.S. leading indicators signals that the world’s largest economy will keep expanding in the 1st half of the 2014. The increase in the New York-based Conference Board’s gauge of the outlook for three to six months matched the median forecast of economists surveyed. The measure climbed for the 13th time in the past 14 months.

Even with the positive economic news, we must bare in mind that we are recovering, not recovered. The US and the Texas region are not back to prerecession numbers in housing. Employment and economic growth are good, but many industries, such as construction (residential and non-residential) are not at prerecession numbers.

Rising consumer prices

A couple of weeks ago figures from the Labor Department showed that the Consumer Price Index rose 0.3% in December 2013. Over the last 12 months, the all items index increased 1.5 percent before seasonal adjustment. Advances (prices increasing) in energy and shelter indexes were major factors in the increase in the seasonally adjusted all items index.

This is lower than the 2.4 percent average annual increase over the last ten years. This is the first time the CPI has gone up less than 2.0 percent for consecutive years since 1997-98. This index shows that consumers and businesses don’t feel that we have fully recovered.

The Consumer Price Index (CPI) is a measure of the average change in prices over time of goods and services purchased by households. The CPIs are based on prices of food, clothing, shelter, fuels, transportation fares, charges for doctors’ and dentists’ services, drugs, and other goods and services that people buy for day-to-day living. Prices are collected each month in 87 urban areas across the country from about 4,000 housing units and approximately 26,000 retail establishments-department stores, supermarkets, hospitals, filling stations, and other types of stores and service establishments.

The economy is improving, but not recovered. The number of long-term unemployment is at a record high, and we need to address those needs. Small businesses are cautiously expanding, but slower than in the past. Since they make up over 85% of our national GDP, small business expansion is key to economic recovery.

National housing market

One of the most watched residential real estate indexes by the media is Case Shiller index. The Case-Shiller Index estimates that home prices increased by 11.2 percent in the third quarter of 2013 compared to the previous year. Home prices nationwide were 17 percent above the trough reached in the fourth quarter of 2011, but remained 23 percent below the peak reached in the first quarter of 2006. The analysis projects that price appreciation is expected to slow to 4.2 percent nationally through the third quarter of 2014 across all U.S. markets, close to its long-term annual average of 4.5 percent recorded since 1975.

By contrast, the best-performing Case-Shiller metro was Dallas/Fort Worth, TX, where the peak-to-trough decline was closer to 15%. Moreover, home prices in DFW are up about 5% compared to the last peak. Austin’s peak-to-trough is -12.6%, and peak-to-now is +7.7%.“Now” in this analysis is October 2013, the most recently reported Case-Shiller data. The data runs 90 days late on specific resale data. For a better description of Case Shiller and its validity to your local market, please visit the Independence Title blog.

Foreclosures

In 2014, foreclosures regionally are not much of a market factor as the following numbers will bear out.

There were 1,361,795 U.S. foreclosed properties in 2013, down 26 percent from 2012 and down 53 percent from the peak of 2.9 million foreclosure filings in 2010. The 1.4 million total properties with foreclosure filings in 2013 was the lowest annual total since 2007, when there were 1.3 million properties with foreclosure filings. That is about 1% of all owned housing units in the nation.

States with the highest foreclosure rates in 2013 were Florida (3.01 percent of all housing units with a foreclosure filing), Nevada (2.16 percent), Illinois (1.89 percent), Maryland (1.57 percent), and Ohio (1.53 percent). In Texas it was 1 out of 2049 homes (.05% of all units). Foreclosures as a portion of this market are not an effective bargaining tool. Their lack of bulk versus the rest of the appreciating market is a not the market factor they were in previous years. In this strong market, not many properties will have a bargain price.

Inventory

The supply of homes for sale in each Texas metro is at a record low. Houston has a 3.7 month supply, 29% less then this time last year. DFW has 3.0 month supply, also a 29% reduction in inventory from last year. San Antonio has a 4.1 month supply, a 9% decrease, and Austin a 2.3 month supply, 20% less than a year ago. That said, most markets had their best year in sales since the start of the recession. And demand for housing in the all Texas metro markets is the best it’s been in probably a decade.
All four major Texas metros have seen an increase not only in residential starts, but also an increase in office, commercial and industrial. This increase in business regionally is already pushing material and labor costs up.

All this leads to another challenging year for homebuyers. Inventory is the lowest I have seen in years. When buyers come out, they are going to see fewer options than last year and homes were selling here as fast as they came up for sale – sometimes for more than asking price. Buyers who came back to the market after sitting things out during the recession have to scramble to land a home. Real estate agents and economists expected that with the significant rise in home prices in Texas in 2013, more properties would go on the market to take advantage of the strong buyer demand.

That hasn’t happened, for many reasons. People like the idea of their equity increasing, but realize that should they sell, they are also going to be in the same crowded group of buyers if they are looking to re-buy in the same market. If they are planning to stay in the neighborhood they are going to be in for sticker shock.

Housing starts and new home sales

Home starts are doing better, but are still at about 50 to 60% of prerecession numbers. A total of 5,823 building permits for single-family homes were issued in December 2013, 13.9 percent more than in December 2012. In the 12 months ending in December 2013, a total of 86,561 permits were issued, 15 percent more than in the previous year.

There were 6,676 multi-family building permits issued in December 2013, 19.3 percent more than in December 2012. During the 12 months ending in December 2013, a total of 56,338 permits were issued, 4 percent more than in the previous year.

After a multi-year bottom of sorts, indicators are up, but the long-term trend is clearly down from previous highs. The good news is that homebuilders, developers, and lenders are much more confident about their prospects with the demand currently outstripping inventory in most of Texas.

Unemployment

Lastly, and perhaps the biggest positive of all is the improving employment picture over the last year. More than 8 million jobs were lost since December of 2007 through 2010 when the recession began to show signs of improving. The unemployment rate in the US (6.7%), Texas (6.0%), and Austin (4.5%) are all well over 3+ points better than at the bottom of the recession. One of the frightening statistics is that 40% of the unemployed have been without a job for more than 6 months, more than any other time since 1946. As this trend has been watched over the last few years it means, essentially, should you lose your job, there is a nearly 50% chance that you will be without a job for at least half a year. For those that have been long term unemployed, it is a challenge to say the least.

Long term unemployment is a real threat to housing market activity subdued. How many people will look to buy homes if they are afraid of the job market?

The sum of the parts

Recent trends in pricing, foreclosures, and inventory nationally seem to support the case for a continued improvement in housing and most real estate, as does the long-term trend in housing starts. All of this leads most to believe that the last year was one of hope and expectation for the housing market and a slow recovery, particularly regionally.

Most economists say the US economy is in a broad based recovery. Let’s look at the positives.

• Low interest rates: Even with the Treasury scheduled to slowing purchasing Fannie Mae and Freddie Mac mortgage-backed securities this year, mortgage rates are expected to remain in the 5% to 6% range through 2014.
• Rising home values: We expect to see price improvements , at least through 2015 nationally, regionally as well as locally. As stated previously, the largest concern is lack of inventory in all channels and how soon inventory can meet demand.
• Strong home affordability: Thanks to historically low interest rates and stable appreciation home prices.

Sincerely, every morning I try to find things to undermine my optimism and enthusiasm about our local and regional economic growth and strength, and it’s getting harder and harder.

Fallout from the shutdown

Last month, we discussed the potential economic impact of the government shutdown. While I don’t withdraw anything stated, realize that after a month of quibbling in Washington the shutdown had very little affect so far. However, without a long-term fix, the budget ceiling and sequester are still rattling the confidence of consumers and financial markets, which in turn is detrimental to housing.

We’ve been lucky to see appreciation around 10% in Texas over the last year. However, many questions remain: Will appreciation continue? What could slow it down? Are we at the start of a bubble?

With home prices rebounding strongly, many have wondered if Texas is entering a housing bubble. I think the answer is no – although housing has come back, it still has room for growth, and a slow down still poses a risk to the economy and markets, although for different reasons.

Starting with the current housing affordability today in Texas it is hard to argue home prices are out-of-line with the fundamentals of affordability locally or on a national basis. Today, the median price for a new home is around $240k in Austin, $176,400 in San Antonio, $187,800 in Houston, $202,300 in Dallas, and $176,400 in Fort Worth. As a state our median home price is $190,000. According to the Federal Reserve the national median is $254,000+. So even with our current pricing we are well within affordable parameters for median incomes.

The national market is a different story. Even though median values are up by a third from 2012 lows, home prices are only back to where they were in 2004. In the summer of 2004 a 30-year conventional mortgage was around 6%. Today it is roughly 4.5%. For this reason, housing affordability is still close to the 20+ year peak reached in early 2012.

So what concerns us about the fallout from the sequester, shutdown, and continued budget impasse? First remember housing is not completely healthy. On a national basis, it is about 40% of where it was before the recession. As we have discussed here previously the economic impact of construction is huge to our regional and local economies. Secondly it is called a recovery for a reason, and as we all know recovery means that there is still a risk of relapse.

Consumer confidence

This index was much more robust earlier in the summer of this year, and it was evident in home sales. Earlier in the summer we saw MLS numbers break each previous month’s numbers, sometimes at a record pace. In September, we saw sales slow. There are numerous reasons, but in my experience as confidence dips below 90, home sales slow. A healthy confidence index is somewhere between 90 and 110.

The U.S. Consumer Confidence Index (CCI) is an indicator designed to measure ‘consumer confidence’, which is defined as the degree of optimism on the state of the economy that consumers are expressing through their activities of savings and spending. Global consumer confidence is not measured. Country by country analysis indicates huge variance around the globe.

In the United States consumer confidence is issued monthly by The Conference Board, an independent economic research organization, and is based on surveying 5,000 households monthly. Such measurement is indicative of consumption component level of the gross domestic product. The Federal Reserve looks at the CCI when determining interest rate changes, and it also affects stock market prices.

This recovery has been a confidence game. Rising consumer confidence has helped spur spending and support growth. During previous recoveries, this rise in confidence was mostly driven by an improving jobs market. Unfortunately, following this recession the recovery in the labor market has been lackluster at best. Instead, consumers have become more confident as household wealth has risen. Between Q2 2012 and Q2 2013 household wealth increased by over 10%, hitting a nominal peak of nearly $75 trillion. Much of this is due to a rising stock market, but employment here in Texas as well as housing has also played a key role, particularly for lower and middle-income households where homes represent the majority of wealth.

Should the consumer confidence index fall below 85 for an extended period of time, be aware that slower home sales is likely.

Mortgage refinancing

In addition to the afore mentioned confidence, homes can and have been used as a source of cash flow. Most home owners are no longer taking equity out of their homes, as they were for much of the 1990’s, rather lower rates have allowed home owners to refinance their mortgage at the lower rates, thus freeing up cash-flow for other spending. In recent years, the surge in refinancing helped support consumption, even as wage gains remained flat. More recently, as rates have risen refinancing activity has slowed. An index tracking the volume of mortgage activity is down by more than 50% since September of last year. In addition, sales in all Texas metros saw the number of sales fall from the previous month. Values are still escalating, but the number of sales dropped. Also during this time, some mortgage processing has slowed or stopped, for a number of reasons, one of which is seasonality. The higher sales rate of the spring and summer typically fall in September as families send their kids back to school. Rates did go up, forcing consumers to rethink their buying capabilities. And the government shutdown as well as the affects of the sequester this year have had an effect.

Fed tapering

The Fed has slowed its plans to taper its bond-buying with the economic slowdown and the lack of consumer confidence, but tapering should begin once the Fed decides the economic recovery is on solid ground and no longer threatened by the shutdown or debt ceiling debate. Tapering will probably increase mortgage rates; even changing expectations about tapering could cause rate swings. And as rates continue to go up, the affordability factor begins to be a bigger issue. In the past, as rates rose, sales increased temporarily as consumers realized they needed to take advantage of low rates.

As I’ve discussed elsewhere, the Fed will be sensitive to the impact of rates on housing. This is one reason we think the rise in rates will be modest and the Fed will pay particular attention to mortgage rates. Second, while housing looks alright, it is unlikely to provide the same tailwind for consumers as it did in ’13, when higher home prices supported confidence and lower rates helped household cash-flow through a surge in refinancing activity. As rates rise, sales will slow.

Construction, home starts, and resales

While housing represents a small part of the overall economy, it carries a great multiplier effect. New homes construction has a 5-7x effect on the local economy. That is, for every dollar spent in new construction, it effectively is respent five to seven times in the local economy. Resales don’t carry the same “dollar bounce”. Since rates began to rise in the spring, housing starts and building permits are both down by roughly 10%.

Has this slowdown or uncertainty affected home values in Texas? Presently due to strong job creation, lack of inventory and the inability to create enough inventory to address the demand, the answer is no. The likelihood of any affect seems minimal at best. Before the shutdown started, several factors were already cooling down price gains, including expanding inventory nationally, higher lending rates, and declining investor activity. Therefore, comparing how much prices have risen in October regionally or nationally to date with previous months can’t, by itself, show if the shutdown has affected asking prices.

If you happen to be in a market where the majority of jobs come from the federal government, it is different. Values have plateaued in some metros, and sales have slowed. Regionally, Killeen, El Paso, and San Antonio have felt affect as over 90,000 defense jobs have been cut in Texas this year. Fortunately, the energy sector has continued to create jobs.

The shutdown, of course, could have other effects on the housing market. The delay in data releases, like the jobs report and home-starts report, created more uncertainty about the pace of the housing recovery. Much more severe, defaulting on the debt would likely create havoc in the housing and financial markets as well as the overall economy. As of today, the worst-case scenario – another prolonged shutdown plus a debt default – is looking less likely, thankfully. But the housing recovery still depends on what the federal government will do in the coming months

Should we be worried about the new budget negotiations? As of today, with the budget agreement to end the shutdown delayed and the need to raise the debt ceiling will trigger a new round of negotiations over longer-term federal budget reforms. Recent debates over the federal budget have included various proposals for scaling back the mortgage-interest deduction, which would raise the cost of homeownership while reducing the budget deficit and short term have an impact on home sales.

Are there any other indicators to watch? I am sure there are, but these are the main ones we are watching. If you’ve been thinking about buying a home, do so quickly. Values, rates and affordability will not get better no matter what the government does.

Continued job growth drives strong Texas real estate market

The median price for homes in the state of Texas hit another all-time high in September 2013 in the four major metros, and demand for homes in the state continues to surge to record levels, increasing home values and rents.

On a statewide basis, 271,839 single-family homes were sold in the last 12 months, up 17% from the previous 12 months. This represents the most homes sold in a single year outside of the boom years of 2005. Additionally, demand in the state was as hot as ever, with 43 out of the 47 markets followed by the Texas A&M Real Estate Center showing an increase in sales year-over-year.

Prices for Texas homes were extremely strong in the second quarter, hitting an all-time high for the quarter. The median price in 2013-Q2 was up 9.98% from the prior year, reaching $177,300. The average price rose 10.44% from the prior year to $235,075. 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 since 2009. What effect has that had on the local residential markets?

Austin

Austin continues to create jobs and has one of the healthiest 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. Resale home inventory continues to dwindle, with just 2.7 months supply available, dropping from 3.7 months supply in August. Builders will deliver 9,200 new home starts this year. Builders are happy that demand is outstripping supply, but are scrambling for developed lots to meet demand. Austin has one of the states lowest unemployment numbers (5.2%) and has been creating 22,000 to 30,000+ jobs per year over the last three years. Remember for every two jobs there should be one housing start, so the new home market has to play catch-up for the last few years. Due to the longer entitlement process in Austin, it will be two to three years before lot development catches up to demand, which in a broader perspective is a “good problem” to have.

San Antonio

San Antonio also has strong job and population growth across the metro, accelerating demand for shelter. With one of the largest oil shale plays nearby and an 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 (97+%). Apartment occupancy remains strong at around 95%, 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

The Metroplex economy continued to improve this year with 92,000+ jobs created in the last 12 months, led by the professional and business sector with over 21,000 jobs. This strong demand has been tempered by the reduction in forces in the banking and mortgage industry. This surge of quality jobs has created housing demand. Over 13,500 apartments are to be delivered over the next 12 months, with occupancy staying above 93%. The lack of listings is slowing home sales in most Dallas-area residential districts. The inventory of homes being marketed by Realtors has fallen to less than a two-month supply in the Metroplex. In addition, the number of pre-owned single-family home listings in North Texas is down 14% year-over-year, according to data from the Real Estate Center at Texas A&M University. The rest of 2013 and into 2014 should remain strong as developers try to secure as much land as possible for future deliveries.

Houston

Houston is the nation’s #1 job creating city. With over 106,000 jobs added 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. The level of development in this area is unbelievable. Last time I was in the Woodlands we counted 37 cranes just from 290 to the business district in the middle of the community. West Houston has the same amount of construction. Even with over 10,000+ apartment units being deliver this year, occupancy has stayed steady at 92+%. Resale and new construction struggle with the tremendous demand for inventory, although we saw a slower September. Resale is definitively a sellers 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. If you were to list the strongest markets in Texas, Houston would easily lead.

Bryan/College Station

Bryan/College Station is another bright spot in the Texas triangle that has seen new home and resales improving over 30% and values following. As in the other metros within the triangle, inventory is lower than a year ago and dropped to less then six months this year. Texas A&M’s continued growth should help this areas continued growth through 2014.

Beaumont

Beaumont saw improvement in values and sales over the last 12 months. Beaumont is one of the few Texas markets where the last four years have been a ‘U’ shaped curve due to the loss of jobs and since then improved job creation. Golden Pass LNG’s expansion in Sabine Pass is expected to create thousands of jobs and generate billions of dollars in investments. We have seen the average price for sold homes move dramatically from $143,839 a year ago to $241,162. This was on the heels of a 45.8% decline in June from a year earlier. Thank goodness that energy has brought strength back to the market.

Amarillo

The real estate market in Amarillo has remained flat (literally as well as figuratively) through 2013, mostly due to a lack of job creation. The good news is that it has become more of a sellers market with resale inventory remaining under equilibrium for the last 11 months. Median values have improved to $139,700 with slow employment growth. Amarillo continues to have the same challenge that most of rural America has: population and employment stagnation. An oversupply of resale properties and little to no job growth has kept things slow for 2013 and through 2014

El Paso

El Paso has maintained strength even with the defense cuts affecting Fort Bliss. Although job creation has suffered this year, the strength of the local market has helped the real estate market continue to move in an upward direction. The median sales price is up 4.9% year to date over last year to $138,600. The number of homes sold has increased 5.3%. The supply of homes on the market has decreased from 8.1 months to 7.3 months. This fast growing population has helped El Paso climb five notches on the Milken Institutes latest Best Performing Cities Index, ranking ninth out of the nation’s 200 metro areas. El Paso did not see the boom price surges as the rest of Texas, so they have seen continued appreciation in new and resales.

Lubbock

In Lubbock closings of new homes increased year-over-year in July, and the market seemed to be hinting at strengthening with a percentage hike more robust than June 2013. The market has been driven by campus enrollment, rather than job creation. There was a 50%+ jump in new home closings from a year earlier. Closings of new and existing homes gained in July after staying steady in June from a year earlier. The average per-unit price of newly sold homes jumped year-over-year to $247,395 in July, up 21.1% from last year. This rise is better than the 10.4% boost in June year-over-year.

Abilene

Abilene has seen improvement in resales this year, and the natural gas boom has added more jobs for the area and should continue to be beneficial for the local economy. Any boom in real estate, however, is unlikely as Abilene moves back into the sort of slow paced market it has been for years. As in other Texas markets, we saw fewer sales and continued appreciation recently. New and used sales are slow and will continue through 2014.

Killeen/Temple

In the last five years three Texas towns had benefited from the military realignment: San Antonio, El Paso, and Killeen. Fort Hood in Killeen is one of the largest United States military installations in the world. At the top of the market, Killeen was doing about 5,000 sales annually. It has dropped to a good pace of about 2,500 home sales with about 700 new home starts. Although sales are slower, values as in other areas of Texas have maintained and appreciated slightly, because of the lack of available real estate. Again the reduction in force caused by the defense layoffs and the near 17 billion lost from the budget impasse at the start of the year has been covered by the continued good fortune of job creation in surrounding towns.

We should continue to see 5 to 10% appreciation of most residential real estate in Texas’s major metros. While this improvement in sales and values is welcome, areas outside of the major metros and oil/gas boom areas will continue to be challenged.

Most of our state did not have the big price drops we saw in the rest of the country, so to see 10% price increases on top of properties that held value in recent years means we’re seeing even more significant growth in Texas over the next few years.

With such strong demand, the inventory of Texas homes has decreased 32.5% year-over-year, to 3.9 months of inventory. A 6-month supply of homes in a market indicates a balance of inventory and demand. The Texas inventory levels indicates strong demand for homes and a seller’s market.

Texas metros as well as many smaller towns will see price appreciation to the point that waiting to buy does not make sense. Whether this is just a couple of year’s appreciation or a longer cycle for the majority of the state is yet to be seen. However, it is safe to say that buying today is a wise investment.

Another look at rising interest rates

With Texas seeing the resurgence of a seller’s market the last year, there has been concern over what could stop it. One concern is the ending of rock-bottom interest rates, and how it will impact the real estate market.

We will begin to find out. Last month the nation learned that the days of ridiculously low interest rates, the lowest we have seen in our lifetime, will soon be reaching the end of their rope — and in some ways already have. With the recent strength of buyer demand, rebounding home prices and an easing of the unemployment rate, Federal Reserve Chairman Ben Bernanke disclosed that the time for the Federal Reserve to start pulling back the reins on its massive $85 billion-per-month bond-buying program is nearing. The idea behind the program was to stimulate the economy by buying bonds in the open market in order to depress interest rates, which has been quite effective.

Many questioned the Fed’s methods, and were concerned about the size and scale of the three rounds of Quantitative Easing, the name used to describe the bond buying program. However the Federal Reserve was able to nudge down a broad range of interest rates to extraordinarily levels for a long time.

No one had expected these artificially low rates to last forever, and they had already been rising in the weeks leading up to the Fed’s announcement. Mortgage rates were still hovering at record lows of about 3.5 percent in early May, only to cross the 4 percent threshold a few weeks later for the first time in more than a year. Today, the national average for a 30-year fixed mortgage reached 4.58 percent, according to Bankrate.com, which, in the grand scheme of things, is still well below historical norms. Since last year we have seen an 1.8+/- point increase in mortgage rates, yet sales have continued to improve.

The low rates have enabled qualified home buyers (and owners looking to refinance) to access cheap financing, adding to already-record-high levels of home affordability. It’s helped bolster a surge in both home sales and price increases (since lower rates help make larger principals possible).

We all knew that this day would come, so it is interesting to see the sudden concern over raising rates. All of us knew upward movement of rates has always been inevitable, the news rattled the markets and real estate industry, which has mixed feelings about whether the market is ready for higher rates.

The fear is that higher interest — coupled with rapid home appreciation — will uproot the affordability that has recently been luring buyers back to the housing market in droves. And they may be correct. Austin and Houston consumers have already found themselves in a position where they notice homes are more expensive than what they’re used to or can afford. The other Texas markets have just begun to see the market turn to a seller’s market. We are coming out of the most affordable time of our lives to buy a home.

Let’s suppose a consumer obtains a 30-year fixed loan and puts 20 percent down on a house priced at $170,500, and if they were lucky enough to catch a 3.5 percent interest rate, the monthly mortgage payment would come to $612.50. But at 6 percent, which is closer to historical norms, that monthly bill would jump by more than $200. Remember for every 1% increase in rates, the consumer is able to buy 12% less.

The view of most economists is that today’s rates aren’t sustainable long term and an increase, as long as it’s gradual, should have a minimal impact. More importantly, it will allow private-sector investors to reclaim the mortgage market and have a truer, market-determined mortgage rate without the Federal government’s subsidy.

This analyst’s view is that rates slowly starting to rise are an indicator of a housing sector that is returning to health. Those concerns that demand will suddenly surge from buyers trying to snag low rates while they still can, only to drop off when rates climb past a certain point, are also somewhat blown out of proportion if you look at historical trends.

In our Texas metros, it’s the surge of home prices, not interest rates, that have been the biggest motivation for buyers this past year. After values staying stable over the last five years in most Texas metros, we have seen values rise because of supply and demand. Presently, realtors and buyers biggest concern is locking something down before prices get too high, which has been exceptionally challenging due to the relentless shortage of homes for sale. Multiple offers and bidding wars all are signs of a strong market with great demand and not enough supply.

Let’s answer the original question: will interest rates have an effect on the local housing markets? Absolutely, but we anticipate the impact to be rather small. We don’t think there will be a dramatic impact on the purchase market. People may qualify for less than they would have before, but the demand is still there. Everyone needs shelter. Whether they rent or buy. However most surveys will show that ‘owning a house is the desired avenue’ for most in our country.

We have seen the effects of rising rates before. Home buying and consumer spending slows for a couple of months as the consumer makes up their mind of the need and shock of losing better money rates. Then it picks right back up. If you look at what has happened over the last month, most local realtors have seen a spike in offers as consumers want to buy while rates are still low. Most understand that the ability off rates coming back to record lows is a thing of the past.

Over the last five years, during the recession, nationally incomes plunged right alongside falling home prices. Texas was spared most of this because of great job creation. Most values stayed stable, but there was not great appreciation due to the concern of national growth and ability to recover. However in this last year, prices nationwide have been seeing stronger appreciation, especially in Austin and Houston where demand is up dramatically (over 30% year-over-year in April). Median household income, on the other hand, has remained relatively stagnant at 2008 levels. That’s where low interest rates had been playing such a huge hand, giving consumers more purchasing power for homes they might not have otherwise been able to afford.

With the lack of resale listings in all Texas metros, and the inability of new home starts and rentals to keep up with demand, values will be the major focus of buyers as rates increase. In the next few months because of this, we should continue to see a surge in home sales and demand. As rates increase we will eventually see a slow down as the consumer tries to understand the inability to buy the dream homes they were looking at last year or last week.

Most realtors and consumers are finding that the house or rental they looked at has been put under contract. And this may happen a number of times to them before they secure any shelter in this stronger market. So yes rates will slow us down, but not for long.

The apartment or house you look at today will not be there tomorrow!

Real housing demand or speculation?

Home prices have increased more than 10% year over year nationwide. In many markets, including ours, buyers are engaging in bidding wars and submitting offers greater than list value.

Headlines and talking heads are beginning to describe this positive development as a housing bubble. Just mentioning the words “housing bubble” in a headline generates buzz and viewers. In reality, this is no bubble, but rather genuine demand for shelter paired with a low inventory of desirable homes.

Many may not understand the difference. All this buzz begs the question of what is the difference between housing demand and speculation? Let’s review some basic parameters for projecting housing growth. For starters, job growth is paramount. For every two jobs, you can count on needing one additional housing start. Apartment developers like to say for every 2.5 to 3 jobs, one new apartment. If you don’t have job growth, there is no need for additional housing.

Let’s look at the four basic laws of supply and demand: demand and the price of a commodity (real estate) have an inverse relationship.

1. If demand increases and supply remains unchanged, a shortage occurs, leading to a higher equilibrium price.
2. If demand decreases and supply remains unchanged, a surplus occurs, leading to a lower equilibrium price.
3. If demand remains unchanged and supply increases, a surplus occurs, leading to a lower equilibrium price.
4. If demand remains unchanged and supply decreases, a shortage occurs, leading to a higher equilibrium price

Speculation is known as the practice of engaging in risky financial transactions in an attempt to profit from short or medium term fluctuations in the market value of a tradable good such as real estate. In real estate the common term is ‘flipping’. I liken speculation to gambling, both are risky and usually involve participants that don’t fully understand the business and the risks.

A good example of a speculative market was Las Vegas in the boom years. In 2005, Vegas had 58,000 jobs created and 39,000 home starts, a ratio of 1.5 homes to 1 job. Now that extra 10,000 starts might not seem much, but when you compare it against actual demand the market gets out of whack quickly. Most of the homes starts were speculative, with little thought of who or when somebody was going to move in. Builders were building just to sell as quickly as possible.

Once you start building for a speculative market, it is hard to stop quickly. It takes a while to understand where the demand is. In the aforementioned example they were building speculatively for a speculative demand. As non-construction employment did not keep up with supply, the market was soon overbuilt, which in turn caused values to decrease.

It is also important to know the lag times in completing new product. In Austin it is 2.5 to 3 years from inception to actual completion of development and housing.

Using Austin as an example, we have 60,000+ people immigrating to Austin on an annual basis.

Not all units available are desirable (cost vs. value, geography, schools, etc). Because of this, and because there has been a limited number of units delivered to the ‘home’ market, the market is playing catch up from the last five years. Presently that places demand stronger than supply, creating a seller’s market.

• 142,669 total rental units Austin SMSA
• 95% occupancy = 7,133 units available

• 10,260 units under construction to be completed 2013

Total of 17,393 rental units available in the next 12 months

• 7,800 to 9,000 home starts this year
• 5,200 listings presently
Total shelter 31,593 units available

When you have demand that is greater than supply it forces prices to price. In Silicon Valley, demand is being driven by a flood of new (Facebook, Google) tech money. This has resulted in employees that have a tremendous amount of new money, but all are chasing after a shrinking supply of homes. Transactions are still below boom levels over the last 25 years and half the level seen at the peak in the mid-2000s. Prices would have to skyrocket, as we’ll see below, to get back to peak levels, so presently although some areas are experiencing record values from the depressed values of the last five years they do have a way to go.’

During the housing bust, the anchor slowing the economy was lack of construction, which in turn was a drag on the economy due to large mortgages and lower home values. Where are values now?

First, prices as measured by Case-Shiller, are still down 27 percent from their peak seven years ago. Case-Shiller calculates nominal prices, not real values. And the (inflation) is up 15 percent since 2006. So real house prices are about 37 percent below 2006 levels and are just now returning to where they were 13 years ago. Bill McBride of Calculated Risk has a great chart showing real house prices going back a few decades:

first chart

And here’s a tip for the math-challenged out there: It takes a larger percentage increase to offset a percentage decline. Take a $100,000 house at the peak. If it fell the real national average 42% percent in the bust, it would have been worth $58,000 at the bottom early last year. But to get back to $100,000, it would take a 72.4% percent increase from the trough. Even now, after the sharp bump off the bottom, prices would have to jump 60 percent to get back to their bubble-era peak.

It’s not just the national market, either. The bubble stories have focused on markets like Los Angeles, San Francisco, and even Austin. But these markets, for instance, are just now getting back to early 2000 to 2003 prices and have a ways to get to boom pricing in 2005. To get back to 2005/06 levels, San Francisco’s home prices would have to jump 60+%, by my calculations (using Case-Shiller data). LA would have to jump 65+%, Phoenix 100%, and Miami 105%. Las Vegas home prices would have to skyrocket 149% to reach ‘boom/bubble’ levels.

second chart

Here in the Texas region, even with our limited exposure to ‘bubble pricing’, Texas values still have not caught up to the long-term appreciation experienced by California and Arizona. People and realtors have a hard time understanding that. Remember, these markets experienced 45+% annual appreciation for a number of years. So even with a 60% drop in value since the peak, they are worth more than when they started. In that same time period Texas and the surrounding region did not experience the highs or lows of the housing bubble.

The continued diversity in price performance at the local level will be a function of job creation. Demand will follow jobs, which in turn will increase values. That is the main reason for the strength of the market in Austin, Houston and San Antonio over the D/FW area presently. The same can be said for the San José and San Francisco areas. There simply is not enough housing.

So again, what is the difference between speculation and true demand? Presently the multiple offers are caused by true demand in Austin, Houston, San Francisco, etc. There is not enough housing with respect to the jobs being created. This does present a small opportunity for house “flippers”, however present financing conditions demand larger down payments, slowing the speculative demand the nation experienced during the boom. Here in Texas, ‘flipping’ was tempered by the lack of tremendous appreciation (40+% annual in California and other ‘boom states). Texas and local homeowners experienced less than 3% annual appreciation at the height of the housing boom. They may be seeing a bit better presently. But you have to look at the whole metro market. There are still challenged submarkets. So just because Tarrytown is experiencing 15+% annual appreciation, does not mean you can expect similar appreciation in Round Rock, Georgetown, or Lago Vista. Real estate is local, and your appreciation is going to be somewhere below or above that. An experienced real estate professional will be able to help you find the ‘true value’ of your neighborhood and home.

Should you decide that you want to get into real estate speculation, just because you did well on your last home investment, does not equate to doing well with real estate speculation. Get with a professional, not only in the real estate channel you want to participate in, but in the submarkets you decide on. All real estate is local, as are real estate experts. I would suggest getting opinions from two or three of the local experts before making a decision.

Is now the time? That is a personal decision you need to make with your family and financial planners. But from this analysts view point, two years ago would have been the best time, now is a good time and the next three to five years should remain strong for real estate investment in our region. Remember I am not a broker, financial planner, or lawyer. I’m just an analyst with over 35+ years in this market, and right now I’m seeing one of the better markets of my career.

Now really is the time to buy!

Recovery or another real estate bubble?

There is a broad consensus that the housing market nationally, regionally and locally has bottomed, and is on its way to recovery. The hanging question is if this housing recovery is real, temporary, or if it could grow into a bubble.

Home ownership is down nationally

In April of this year, the US homeownership rate hit an 18-year low, signaling a shift away from homeownership towards rental housing. The homeownership rate in the United States fell during the first quarter 2013 to 65 percent, plunging to the lowest level since 1995, according to the US Census Bureau. The homeownership rate is now far below the 2005 boom peak of 69%. Homeownership was lowest in the West at 59 percent and highest in the Midwest at 70+ percent. Although Americans are still buying homes, tighter credit conditions and limited inventory are still holding back many homebuyers who are opting to rent. The Great Recession slowed down household formation, but it did not stop it. Remember, people are still graduating from college, getting married, having families, etc., so there still is a need for shelter. Here in Texas, the need for housing is great.

Many investors are seeing this as an opportunity. The consumers’ inability to buy for whatever reason has allowed cash investors to provide shelter. Over the past few years equity REITS such as Blackstone Equity and Colony Capital have invested an estimated $6.5+ billion (just these two groups), scooping up thousands of foreclosed and REO single family homes. The single family rental market was a large portion of the market, even before the housing crash, with 16+ million homes designated as rentals nationally in 2010, according to the US Census. Add on top of that at least five million plus foreclosures, many of which could become investor-owned rentals, and the potential scale is apparent.

These properties are traditionally in distressed markets where the ability to purchase at a significant discount is still available (often a 40+% discount to current construction costs). The opportunity provides a long-term income stream as well as the opportunity for appreciation — which may come slowly at first but will improve along with the greater housing market. Historically, buying in downturns has produced a strong return, from 10+% annually to much higher.

The key to their success will be effectively managing these properties, which are spread out over geographic areas rather than concentrated as they would be in an multifamily or commercial opportunity. These REIT’s are trying to get as close to the multi-family apartment model as possible. While there cannot be one landlord in one location, REIT employees are armed with tablets and laptops, helping communicate current information from the field. From the inspection and construction teams inspecting potential homes for purchase, to the project managers checking in on homes they are rehabilitating, to the agents showing homes to potential renters, to the handy-men answering renter complaints, all the information is transmitted back to the main office from wherever they are.

Other than DFW, the large REIT’s have not been as active in single family in Texas. The inability to buy large numbers of discounted properties due to the limited supply of homes has prevented the large equity groups from making significant plays in Texas. It doesn’t mean it couldn’t happen, this analyst just believes that that opportunity passed a couple of years ago in this state.

Low Inventory

Meanwhile, here in Texas, there is a shortage of existing homes and new homes for sale. Nationally, there were only 1.68 million previously owned properties on the market in March 2013, down from 1.93 million the prior year, according to the National Association of Realtors. That’s the fewest since March 2000. Here in Austin there is only a 2.7 month supply of resales available, 25 percent fewer than April 2012. In San Antonio housing inventory has held steady at 5.2 months since February. Houston is at a 3.4 month supply, a thirteen year low. And in DFW there is currently a 3.3 month supply of homes— the lowest inventory in almost 20 years. In a healthy balanced market, there’s roughly a six month supply. This March, nationally the number had fallen to a 4.7 month supply — a market favorable to sellers. Limited inventory pushes prices up. The median value of an existing home rose 11.8 per cent, the most since November 2005, to $184,300 last month from $164,800 in March 2012. Many listings are seeing multiple offers. Does this indicate a coming real estate bubble? Not quite.

The same, but different

One of the reasons we are hearing murmurs of a bubble are the stories of frenzy – homes in Austin are selling as fast as they are being listed, and those in desirable areas are receiving multiple offers, sometimes above list price. However, this isn’t a speculative bubble. It’s driven by the lowest inventory levels we’ve seen in years. As stated above, nationally, regionally and locally the inventories are low; home inventories are at 1.9+ million units, which is equivalent to about 4.7 months of supply, based on the current sales rates. And inventories keep dwindling on a year-over-year basis with little to limited replacement. Nationally inventories continue to decline, with 135 out of 146 markets tracked by NAR experiencing year-over-year inventory declines, with about 25% of the markets seeing declines of 20% or more. New home construction has been held on a tight leash, with limited speculative construction due to previous lower demand. Considering that, there’s no way we’re getting to six months worth of supply any time soon locally or nationally – not unless home construction activity picks up in a major way. New home construction remains over 65% below the peak, which also flies in the face of any bubble talk.

What about foreclosures?

Yes, they continue to happen, but they have slowed down dramatically from the top of the bust. Foreclosures fell 27% from where they were a year ago, to the lowest level since 2006. Yes, they continue to happen in Texas, but because of demand remain less than 1.5% of all sales. They are basically a non-factor in this region and they have slowed down dramatically nationally.

Values improving

As more buyers bid on fewer properties, prices are being forced up. Home prices are rising even as homeownership drops. Prices in the top twenty cities have risen 9.3 percent in the past year, according to the Case-Shiller Home Price Indices that track home prices in twenty major metropolitan markets.

Inventory will continue to be challenged as long as interest rates remain low. The tight supply isn’t the only factor slowing the housing market. Homebuyers are facing fierce competition because of record low rates. It is hard to argue with purchasing when rates are so low. Who could refuse the Federal Reserve’s cheap credit? So yes, the claim that the housing rebound is closely tied to the Fed’s campaign to lower interest rates is true. The Fed Rate which has pushed down mortgage interest rates to historic lows has made housing an attractive (and affordable) investment. The low interest rates have lured investors of all stripes to buy homes, a large factor in the diminished inventory we discussed.

So, when you couple this scarcity of listings – particularly high-quality ones – with historically low interest rates, what do you get? Competition for properties, of course. It’s the basic economic principles of supply and demand at work. But as we have stated before, we don’t have to fret about this situation leading to another bubble.

First, increasing record low mortgage rates will slowly erode record affordability. Borrowing costs for a 30-year fixed mortgage just hit 3.51%, the highest level in six weeks, yet are still tremendously affordable compared to the boom. As rates creep higher, it should help contain demand and slow purchases. Second, most mortgage applicants now boast FICO scores above 740, over a 100 points higher than during the boom. Yes, the industry wants to improve and increase lending. There is more capital available than ever before at the banks and equity groups, but they are still concerned about down payments and lending standards. Lending standards remain tight. Insisting on higher credit scores ensures that the real estate market doesn’t get (way) ahead of itself again.

To have a bubble of any type, you need speculation and financing. There may be some speculation happening locally, but it isn’t the short term house-flipping type speculation seen in the boom years in CA, FL, etc. Lenders and appraisals continue to be cautious, taking a lot of the wind out of potential bubble concerns. What we are seeing locally is genuine demand, driven by job creation and inmigration, and low supply due to the slowdown in home construction in the last five years. Increasing values are because of need, and not the speculation we saw in the boom. Any speculation is tempered by the large capital needed to be an investor, typically at least 25% down.

High Demand

Whether it is local, regional or national, we have had a record low number of home sales the last five years. Household buying slowed, while household formation did not. With little to no inventory being produced the last five years that demand is finally catching up to us. Austin needs 23,000 to 25,000 to meet demand, San Antonio 18,000 to 22,000. Another way to look at it, is for every two jobs, you historically have one housing start. That hasn’t happened in any of the Texas metros over the last five years. So, we are playing catch up as well as facing future demand, leading to a healthy local and regional markets for a while.

The continued strength of national, regional and local employment will continue to push the demand for housing, whether rental or purchase. There is always a need for ‘shelter’, both new and used.

The bottom line is that we don’t appear to be in another real estate bubble. Not yet, at least. Is the potential there? Always. But again there is a difference between demand and speculation, and what the Texas metros are experiencing is a strong demand, not speculation. So, forget talks of a bubble and continue to look for ways to profit from the current recovery.

Texas vs. California (Part 3)

This is our third installment in a series discussing Texas and California. We have written about why businesses and individuals seem to be leaving CA for TX. One in five Americans calls California or Texas home. The two most populous states have a lot in common: a long coast, a sunny climate, a diverse population, plenty of oil in the ground, and Mexico to the south. Where the states really diverge is in their governance.

Let’s look at population, GDP, and the states’ respective budgets. We will use budget data from the Census Annual Survey of State Government Finances and job and per capita income data from the Bureau of Economic Analysis.

Last year (2012), California had a population about 30% larger than Texas, a deficit 210% higher, and state debt 380% higher. It’s safe to say that low-tax Texas appears to be in a better fiscal shape.

California earned the name “The Golden State” and adopted the motto in 1968. The nickname’s origins are from the discovery of gold in 1848, and the expansive fields of poppies and many opportunities present in the state. In 1950 the Golden State had 40% higher per capita income than Texas. In 1970, the advantage was still over 30%. By 2009, the difference had shrunk to only 10%, without taking into account the higher cost of living in California.

As we have discussed the last couple of weeks, it appears that Texas is doing better than California not only fiscally, but also in terms of aggregate job and income growth.

One thing I would warn about is exaggerating California’s debt problem. It’s true that they have mismanaged their finances, and expanded government seemingly beyond what they can afford. However, California is still extremely wealthy, with a total GDP of about $1.8 trillion dollars in 2011. This is bigger than Brazil and Russia ($1.6 trillion) and almost as large as Italy ($2.3 trillion). Texas is $1.2 trillion in comparison. So while their tax base may appear narrow, their entire economic base is very wide. The debt to GDP ratio for California alone is still below 10% (or 80%, if you add the national debt).

Also, let’s not make too strong policy-inference from the short-term (less than ten years) mortgage-bubble that is currently distressing California. Policy should be based on evaluations of long term performance. We would argue above that the long term trend also favors Texas.

There are many other reasons why Texas is thriving while other states flail.

Rising oil prices

A boon for Texas, California not so much.

In 2012, the Brent crude oil spot price averaged $112 per barrel, and rose to $119 a barrel in early February. Even though we have seen an unexplained surge at the pumps lately, the Energy Information Administration is projecting an average price of $109 a barrel. Crude prices peaked at $134.02 per barrel in June 2008. Those rising oil prices may have been bad news for drivers, but they helped out the Texas and California economy, which rank #1 and 3 respectively in oil output.

When oil prices are high, job growth in Texas historically has exceeded that of the nation. Texas entered the recession late and came out early, mirroring trends in oil prices, which rose towards the beginning of the recession, fell in 2009, but have been steadily rising since.

The states that are expanding economically are almost all energy states. Based on Dallas Federal Reserve research, a 10 percent increase in oil prices leads to a 0.3 percent rise in employment and a 0.5 percent rise in GDP for the state of Texas.

One of the big differences between the two states has been the introduction of fracking. New recovery techniques, such as steam injection and later hydraulic fracturing (fracking), changed the industry and lessened our reliance on other countries oil production. A decade ago, Texas oil engineers decided to combine horizontal drilling with a process called hydraulic fracturing, which injects chemical-laced water into the shale to push out the minerals. The system has been effective in releasing previously untapped pockets of natural gas in shale formations, such as the Eagle Ford shale formation in South Texas. In 2000, 1 percent of the U.S. gas supplies were from shale, but now the figure is 25 percent. And as a result of the new technology, Texas is home to some of the most prosperous new oil fields in the country.

Fracking has opened up the Eagle Ford formation to tremendous economic opportunity. This region of south Texas was a sparsely populated area that has not historically been very economically strong. Fracking has breathed new life into the area and has not only brought jobs but has also created a new set of millionaires whose land has sky rocketed in value.

In California, fracking has kept older fields open, particularly those in Kern County, and has preserved CA’s place as the nation’s third largest petroleum producer. But to this point, fracking has not been used for new fields due to environmental and regulatory concerns. Meanwhile, oil production is booming in other states, principally North Dakota and Texas, due to extensive use of fracking to tap into deposits in shale — so much so that the U.S. may soon become an exporter again.

But what about California? It’s been estimated that deep shale deposits in California, particularly those along California’s Central Coast and in the Central Valley, contain as much as 400 billion barrels of oil, equivalent to half of Saudi Arabia’s oil fields. But whether California experiences a new oil boom similar to one it saw in the early 20th century depends on whether the state’s extraordinarily sensitive environmental conscious can tolerate more fracking, particularly along the coast.

So will California see a new oil boom? Not immediately, but the potential is there to help improve a somewhat stagnant economy, create many thousands of jobs, and pump billions into state and local government coffers. The question is at what cost?

Housing costs

Texas has been referred to as one of the remarkable economic stories of the last decade. But its growth isn’t due to the wealthy fleeing to places with the lowest tax rates. If you look closer at the data, the people moving out of the state are wealthier than those moving in — so the lower housing costs and living expenses in Texas is a major magnet.

We all are aware of the ramifications of runaway real estate appreciation. From 2000 to 2006 as California experienced over 250% appreciation of real estate assets (Source: OFHEO). At the same time Texas was 50th in appreciation with less than 3% annual appreciation annually.

This lack of appreciation in Texas helped the state escape the foreclosure bust that crippled other states’ economies —less than 2 percent of Texas mortgage borrowers are in or near foreclosure, according to the Mortgage Bankers Association, while the national average is nearly 10 percent. States like Arizona, Florida, and Nevada faced mortgage borrower foreclosure rates of 13, 12, and 19 percent, respectively, in 2012. Texas’s relatively stable market may have been a factor in preventing housing prices from climbing. California and Nevada have been helped by investors shoring up prices. As of December, 10% of Florida’s home loans were still in some stage of foreclosure, the highest percentage in the nation. Behind it were New Jersey (7%), New York (5%), Nevada (4.7%), and Illinois (4.5 percent), according to CoreLogic. Among the five, only Nevada is a non-judicial foreclosure state.

Some credit Texas’s stability to state regulations on cash-out and home equity loans, which don’t allow borrowers to take out loans that total more than 80 percent of a home’s appraised value. California, Florida, and many other states had a run of 100% refinances with borrowers sometimes refinancing two or three times in a couple of years to retrieve money from their over-appreciated homes. These cash-out loans allowed borrows in other places to refinance their homes for more than their original mortgage value — driving up home prices and contributing to the eventual burst of the housing bubble.

Another factor in Texas that prevented housing prices from rising dramatically during the housing boom is the abundance of cheap, open land and easier building regulations. Look at land values on both coasts as well as the length of the entitlement process (the process from purchase through engineering to the start of development). 6 months to 2.5 years in Texas is a walk in the park compared to 7 to 10 years in California, Florida, Arizona and other ‘boom’ states.

Affordable homes are one of the key reasons Texas continues to thrive. The California average home price is $738,526 and the median price is $452,000. Texas is significantly less expensive with a $283,137 average price and a $144,900 median price. Affordable land and limited municipal and state regulation allow for less expensive homes. In Texas the cost of the home is traditionally 5x the price of the lot, or 3x the price of the lot in more desirable areas. In California, it is the opposite, where the land is typically the largest cost.

Cost of labor

Immigrant workers make up the majority of migrant farm workers in places such as California’s Central Valley and southern Texas doing seasonal work such as fruit picking and sorting. Seventy five percent of crop workers in certain areas are from Mexico and about half are undocumented, according to a 2011 U.S. Department of Labor survey. Immigrant workers make up a vital part of the construction workforce. In California, Nevada, Texas and Arizona, it is estimated a third of all construction workers are immigrants. Twenty percent of construction workers nationally were born abroad. Of these figures, more than half came from Mexico and another 25 percent from Latin American countries.

Both states have a pool of cheap, unskilled labor. However, skilled labor is another story. Businesses are moving away from areas with a high concentration of unionized skilled labor. As Dr. Mark Dotzsour from Texas A&M said, ‘Let’s face it. Employers come to Texas and other southern locations because they feel that they can make a higher profit. Taxes are a major consideration. So is the cost of labor. Clearly businesses are moving away from areas with a high concentration of unionized labor.’

The Bureau of Labor Statistics puts out information about the percentage of all workers in each state that are represented by a labor union. Here are the states with the highest concentration:

• New York, 24.9%

• Alaska, 23.9%

• Hawaii, 23.2%

• Washington, 19.5%

• Rhode Island, 18.4%

• California, 18.4%

• Michigan, 17.1%

• New Jersey, 16.8%

• Massachusetts, 16.2%

• Illinois, 15.5%

Here are the states with the lowest concentration:

• Arkansas, 3.7%

• North Carolina, 4.3%

• South Carolina, 4.6%

• Georgia, 5.4%

• Virginia, 5.5%

• Minnesota, 5.7%

• Tennessee, 5.9%

• Texas, 6.8%

Many companies like the flexibility associated with the ability to freely make decisions without the pressure of a union, so states with a low percentage of a unionized private sector labor force ranked near the top for many business owners and CEO’s. That coupled with a lower cost of living for a company’s workers has made moving companies to Texas more attractive.

The ability to make money motivates workers, suggesting an advantage for places with higher pay. The nation’s leaders in earnings per job were found in the Northeast, led by New York, Connecticut, Massachusetts and New Jersey. California, on the other side of the country, comes next. These states lost some of their appeal because steep living costs and taxes ate into the higher pay. Texas, a state with low living costs and taxes, ranked a respectable 13th in earnings.

As we have discussed the last few weeks, both states (California and Texas) have their strengths and weaknesses. Each has had their chance for their day in the economic sun. The question is what will the next decade bring? The strength of less regulation and lower taxes or the need for more government services? California’s habit of raising taxes to fund a burgeoning regulatory state isn’t without impact on its economy. Californians fork over about 10.6 percent of their income to state and local governments, above the U.S. average of 9.8 percent. Texans pay 7.9 percent. This affects the bottom line of both consumers and businesses.

Presently Texas seems to be the people’s choice.

Strong local economy spurs San Antonio housing market

The strength of the Texas real estate and housing market has been making headlines nationwide. Forbes recently identified the Austin MSA and the Houston MSA as the #1 and #2 fastest growing areas in the nation. Dallas and San Antonio rounded out the list at #4 and #9, respectively. We wanted to give you some idea of what the new year will bring, with a focus on Austin’s neighbor to the south, San Antonio.

Consumers and investors looking to get in on the action should take a close look at all of the major metros in Texas. While Austin and Houston have been getting more national attention as of late, San Antonio has just as much to offer, with high quality of life, a vibrant local economy, and low cost of living.

Let’s start with projections for the residential market in our major metros. These figures are driven by the strong job creation in each of the metros.

Projected home starts for 2013, by metro:

• Houston: 27,500 (a 28% increase in 2012 from 2011)

• DFW: 20,000 (a 21% increase in 2012 from 2011)

• Austin: 7,800 to 8,500 (a 30% increase in 2012 from 2011). Finding enough developed lots is the biggest challenge to meet this number)

• San Antonio: 8,000 to 8,800 (a 17% increase in 2012 from 2011)

Resale activity faces the same challenges, with little to no inventory.

• Houston: 73,994

• DFW: 75,207 sales last year

• San Antonio: 19,940 sales last year

• Austin: 27,000 sales in the SMSA (Austin is challenged with only 5,700 listings available as of the end of 2012.)

Apartment occupancy is strong in all metros with:

• Houston at 97%

• DFW at 93.1%

• Austin at 95.4%

• San Antonio at 90.5% (60%+ of the rental market is in the ‘C’ classification, which in turn explains the high turn over and higher vacancy rate.)

Again, most have seen the coverage of Austin and Houston’s success. Below we discuss San Antonio, a market that saw some impact from the recession, but has continued with a steady growth of jobs with base strong industries military, medical, and education.

When all is said and done, San Antonio’s home sales show a two-and-a-half year peak – and the total number of home purchases was 10% higher than it was in 2011, with a total of 19,940 homes sold, according to SABOR. The last time we saw this many contracts was in April 2010, and back then, buyers were rushing out to take advantage of federal tax credits. This time around, though, there isn’t any kind of incentive. Instead, people were out buying simply because they want or need to!

And, luckily, the momentum has carried into 2013 – it’s safe to say that San Antonio is seeing a housing surge! Real estate experts around the Alamo City expect the number of home sales to increase another 10% in 2013. While that’s not quite as big of a jump as we saw in 2012, it’s still a huge gain. And, considering the demand is based solely on the market itself – rather than any kind of incentive programs – it’s a testament to just how strong things are getting here.

Also on the rise in San Antonio has been the average price of a home. Locally, the average sales price for December 2012 for single-family residential homes registered at
$192,789 (a four percent increase from December 2011).

Breakdowns in prices show 64.6 percent of homes sold in the low-range ($199,000 and below), 32.04 percent in the midrange ($200,000 – $499,000), and 3.17 percent in the high range ($500,000 and up).

Because of the industry San Antonio has, affordable housing is one of the strengths of the San Antonio market. The median price for a home in San Antonio is $50,000 less than in Austin, with less traffic congestion. For comparison’s sake, this is also $181,000 less than the median home price in California – a fact that is often met with disbelief from Californians.

One challenge as 2013 moves along is that buyers around San Antonio will have less existing homes to choose from. This is good news for homebuilders who saw a 17% increase in starts from 2011, up to 8,077. This strength is projected to continue. This continued improvement in the San Antonio’s housing market has caused builders to take notice. As a result, local experts expect to see the number of newly-built homes increase by as much as 15% by the time this year is over. These won’t just be your run of the mill production homes, too. Home construction has been on the rise in San Antonio for the past several months, and throughout that time, one thing has been clear – people here want luxury homes. In fact, the number of home sales between $200,000 and $500,000 jumped 30% last year, so builders are taking full advantage of that trend. As a result, the number of San Antonio’s custom-built homes is expected to go up significantly this year – simply because the market demands it.

What is causing this surge in interest in the Alamo city? Part of it is simply due to location. Texas has had a strong overall economy. However, San Antonio gets the benefit of sitting right along the I-35 corridor – with Austin less than 100 miles to the north. It’s also only about three hours from Houston – a city that continues to mystify everyone with it job creation of over 90,00 jobs annually. In addition, San Antonio is a gateway to our neighbors to the south. Trade and migration with from Latin America has greatly benefited the city.

The largest employment sectors in San Antonio are education, medicine/biosciences, and government. Education, military, and local government spending employed a third of the city’s workers in 2012.

The large concentration of government workers is due mainly to the location of three military bases in the area—three Air Force bases (Brooks, Lackland, and Randolph) and one Army post (Fort Sam Houston). From the days its first mission and accompanying presidio military post were founded in 1718, San Antonio has been regarded as an area of strategic importance. By the end of World War II, the city had become the location for the nerve center of the nation’s defense network, and it remains the headquarters for the largest military establishment in the United States. The bases provide employment to approximately 74,500 military and civilian personnel and have an economic impact on the local community of $27 billion.

Education is represented by 31 colleges and universities (mostly public) that enrolled another 100,000 students, boosting the cities population by 8 percent in school time. Hundreds of thousands more jobs are in services that would not have existed without government-supported hospitals and military spending.

In 2012, the impact of the medical and biosciences industry on San Antonio’s economy surpassed $29 billion. Based on a conservative estimate, health care and bioscience industry stakeholders paid out $7.5 billion in wages and salaries to more than 156,000 employees in 2011, and more than one out of every six San Antonio workers was employed by the industry. San Antonio has gained more than 40,000 new health care and bioscience jobs over the last decade.

In addition, San Antonio itself has been the recipient over the last few years of a strong oil and gas industry – improving economic stability and allowing San Antonio to worry less about what the rest of the economy is doing.

Putting more pressure on home sales is San Antonio’s rising rental prices. The San Antonio apartment market occupancy figure is up 1% to 92+%, rental rates have increased 5+% to $.94 per sqft., and absorption has been the best since the boom years in 2005. Rents have more than kept up with the cost of living index while occupancy continues to hover just over 90% over the last seven years. As in other Texas metro markets, this has caused consumers to compare buy vs. rent more aggressively.

Some national markets are still troubled by foreclosures, but not San Antonio. The local foreclosure rate for San Antonio stands at 3.1% making it No. 312 out of 366 metro areas according to Realty Trac. A tremendous improvement over rates four years ago, when 6.8% of homes in the SA area were under foreclosure.

Other reasons companies and consumers are relocating to SA are the low tax burden, central time zone, and bilingual workforce. For relocating companies, the cost of utilities, water, and power range around 20% less than the national average. San Antonio traffic is much easier to get around in than so many metros in Texas and the US. Why? Over the last 40 years, city leaders have spent over $500 million on roadways. I am always blown away by the low average commute time of only 15 to 20 minutes.

The good news for San Antonio’s growth is that of the four major metropolitan cities in Texas, San Antonio has had the strongest growth in both exports and GDP since 2005. In fact, exports as a percent of GDP have more than doubled between 2005 and 2010. Although San Antonio’s overall GDP is the smallest of the four Texas metro areas, in terms of exports as a percentage of GDP, San Antonio ranks third and surpassed Dallas in 2009. This should help continue strength in the housing market.

San Antonio has two strong sub markets. South San Antonio has been a benefactor of the Eagle Ford shale play. The strength of this market has helped all real estate channels from residential to industrial and should continue for a projected 15 to 20 years.

Another one of San Antonio’s strong submarkets is New Braunfels. In this small, historically German and Hispanic town, the growth has been driven by mid-management retirees from the military or energy industry. Blue / Green properties was a major influence with their aggressive land sales to this market. Couple that the closeness to medical and military bases, low cost of living for retirees, and you can see why the market has done well. Over the last year we have seen home resale inventories decrease slightly, helping values. Distressed properties such as foreclosures and short sales remained the same as a percentage of the total market in January and have had little impact on values. The median home price is $259,500, a 10% increase from a year ago.

The residential rental market in New Braunfels is like most Texas metros, strong at 95% occupancy, and rents at record highs.

However, not everything is completely rosy. There are some challenges and opportunities within the San Antonio office market channel.

The overall strength of the San Antonio’s real estate market has been the steadiness through the recession, with no big dips or rises. Most local submarkets seem to have turned the corner. However, the office sector is still challenged caused by the ATT relocation a couple of years ago to Dallas. This has put citywide office vacancy close to 18%. While metrowide growth in San Antonio has boosted job creation and generated new demand for local space this year, office vacancy continues to rise. Why? Most of this challenge is attributable to corporate relocations to recently purchased or build-to-suit properties.

One of the office submarkets hit the hardest were the northern SA submarkets, where Kinetic Concepts Inc. (KCI), NuStar Energy, and Nationwide leave behind more than 400,000 square feet of previously leased space. The CBD continues to be challenged, with food-supplier C.H. Guenther vacating approximately 55,000 square feet to move into its newly built headquarters, though the majority of recent vacancy can be tied to AT&T, which continued to shed space and consolidate its remaining San Antonio staff in the first part of this year. At one time, ATT had over 400,000 square feet in the CBD.

Where is the opportunity? This much contiguous office space available is in short demand in Texas as well as most major metros across the nation. This puts San Antonio at an advantage and has a number of relocating corporations looking here because of the availability of space. 2013 – 14 could lead to some major announcements helping the local market.

What do this mean for San Antonio area home buyers and sellers?

Barring resurrection of the recent economic recession, it’s likely San Antonio’s home sales market will remain strong through 2013. Because the area’s inventory of available homes is relatively low, 2013 will see a moderate to strong San Antonio area home seller’s market, quicker sales, and higher than average list and sales price appreciations. That’s not necessarily bad news for home buyers, because quality San Antonio homes will likely remain remarkably affordable when compared to similar products in the nation’s other large metropolitan areas.