Is real estate still a good investment, or has the U.S. housing market finally topped out after one year of recovery? Over the last few months, pending home sales have slowed down due to weather, a rise in mortgage rates, and a 12% rise in home prices from the same time last year. Many are wondering if the housing recovery is over.
We saw the biggest real estate and financial bubble with the longest recovery following it since the Great Depression. Housing and real estate prices, fueled by easy financing and speculation, topped out somewhere in 2006 or 2007. Then the market collapsed, taking global financial markets with it. It has taken six years for the recovery to take hold.
The mentality of potential buyers fundamentally changed. They saw homeowners lose over $8+ trillion in asset value. Many questioned the validity of owning real estate due to the devastating effects of this bubble. After seeing so many homeowners in upside down mortgages, many felt that renting was better than buying. It changed demographic habits across the country. Children moved back in after college. Household formation of couples moved back 5+ years. The housing market underwent a fundamental shift as home buyers became scarce and homebuilders scrambled just to stay afloat.
A few parts of the country didn’t see a housing boom, and some parts (such as Texas) didn’t really see a bust. That does not mean they went unscathed. In general, because of the real estate and financial meltdown, we saw a fundamental change in financing from acquisition and development through mortgage policies. Harsher lending guidelines were but in place. Government backing of the majority of the housing market was no longer desirable. All of this had a dampening effect on real estate that we still feel today, no matter where you live.
So why the concern about real estate slowing? Nationally, existing home sales were down 7.5% year-over-year in March 2014. In the same time period, however here in Texas there were 22,511 sales of existing single-family homes, 3% more than in March 2013. Values continued to improve regionally, the median sale price for an existing single-family home was $178,000 in March 2014, 8.1 percent higher than a year ago. In Austin, most realtors will tell you there biggest concern is lack of inventory.
New home starts face similar issues. Nationally, this March was down -5.9% from this time last year, another sign of the market possibly slowing or catching its breath. In Texas, we saw a total of 8,023 building permits for single-family homes were issued in March 2014, 7.4 percent more than in March 2013. In the 12 months ending in March 2014, a total of 87,931 permits were issued, 12 percent more than in the previous year.
Here in Austin, we have been about 5,000 home starts annually short for the last two years and this year looks the same. Remember for every two jobs there should be one home start. Austin has been averaging just over 30,000 new jobs the last couple of years. All the Texas metros have delivered less than demand. This is a good problem to have, particularly when compared to the rest of the country. New home sales are up significantly from the bottom, but are still historically very low. There really is nowhere to go but up. A growing population will require more new homes.
With this demand, values have increased, which has people wondering if we are entering another bubble. They point to the fact that the housing market is being propped up by low interest rates, a loose monetary policy by the Fed, and bank bailouts. While these things are certainly true and they do prop up real estate prices, I believe that true demand is what has caused values to surge.
Others believe that real estate prices will continue to go up, while maintaining that it is not a bubble yet. They point to the Federal Reserve’s focus on inflation. Whether there is high inflation or low inflation, most investors look for undervalued hard assets. You can’t get more of a hard asset than real estate. So if you expect inflation to continue to get worse, real estate is something to seriously consider, whether it is your first house or an investment piece of property.
As far as concern about a bubble locally and regionally, this analyst and others will tell you not to worry. Regionally housing prices bottomed somewhere around 2011, we have seen them climb quite significantly, though still not to the levels we saw in 2006 in most places. The supply side is the biggest constraint to housing and real estate growth in Texas and our metros. For a more in-depth discussion, check out the Independence Voice blog.
Worrying about the housing market has been common for the last few years. However, it is time for the media and the consumer to look at the reasons to buy into the housing and real estate market. The vast majority of markets in the nation as well as Texas do not have enough inventory for the demand. Housing and real estate is lagging because of the residual effects of the housing and financial crisis.
So why the slowdown nationally? Numerous reasons:
• Lack of foreclosures and short sales. Most of the distressed product has been acquired, and most values are no longer offering the large discounts that the investors are looking for.
• Rates increasing historically slows down sales for a couple of months, while the public decide whether they will see low rates again or not. As most of us over 40 know, rates are at a historical low. Why wait?
• Foreclosures have dramatically slowed as well as bank and mortgage company failure. The investor that was buying the last couple of years no longer has the opportunity he had the last 3+ years to get discount prices. With less distressed inventory, the investors as well as the consumer are scrambling for product. Supply has not met demand yet. Foreclosures were never much of a factor in Texas. Many of the consumers looking today realize that the ability to find a distressed ‘dream home’ is no longer possible. There is little to no residential, commercial, retail, etc. real estate available in Texas at a distressed value. After a couple of weekends shopping in our metros and cities, most consumers realize that trying to find that perfect deal or home at a discounted price is not possible.
If you live in Texas, waiting to buy a home or investment property will cost you.
• Rates are at historical lows, every time that rates increase you lose 12% buying power. Why wait?
• Whether renting or buying home and real estate values continue to improve. How much? High single digits in most metros in Texas. Yes there are those high demand areas that will be double digit, and those low demand areas that will be in the low single digit. However they are all moving in the same direction, up!
• Comparatively, in most of our metro markets, real estate is still pretty cheap in Texas. Throw in the cost of living compared to most metros outside Texas, it is a dramatic reduction in cost for most families.
• Whether nationally, regionally or locally, real estate historically has been a great long-term return. If you look back 30 years, real estate is still valued much higher than it was. And if you are looking at investment property, and if you have tenants paying your mortgage, it makes the investment that much more profitable. Most Texas metros have seen rent appreciation higher than actual real estate value. What does that mean? Austin has seen a 58+% increase in rents the last 10 years. Home value and real estate appreciation has been around 38+/-% in the same time.
So if you are buying a house (as opposed to renting) because you need a place to live, this might be a valid time. However, it’s important to remember that buying a house to live in is not really an investment, other than the fact that you need a place to live. The only sense it could be considered an investment is that it’s somewhat of a forced savings plan, as you pay down the principal balance on your mortgage each month.
Housing is a slow moving market – and the recovery will not be smooth or fast with all the residual problems. But overall housing is clearly improving and the outlook remains positive for the next few years. I know, I know – you’ve been hearing for years that it’s a great time to buy real estate. When the bubble burst a few years ago, and people were losing money on their houses, it made investing in real estate a scary proposition. But thanks to the same recession that caused the real estate mess, there are loads of opportunities for those with the financial resources and means to buy real estate.
(Note: I will be out on sabbatical, so the Voice will go on hiatus until June)