2013 Texas Metros Housing Forecast

This week we had the good fortune to attend the 2013 housing forecast by the Austin Home Builders Association and the Austin Board of Realtors.

Although the discussion was centered on Austin, the majority of the statements apply to what is happening in all Texas metros. Here are some of the major points about Austin from the fifth annual HBA/ABOR forecast.

Dr. Jay Hartzell, Chair of the Department of Finance in the McCombs School of Business at UT Austin gave us an overview of the world economy. As strong as our regional economy has been, it’s easy to forget that going into 2013, the global and national economy were still trying to shake off the fallout from the crisis of 2008-2009.

However, despite concerns about looming tax increases and government spending cuts, American employers added 155,000 jobs in December. Employees also enjoyed slightly faster wage growth and worked longer hours, which could bode well for future hiring. Job growth, almost exactly equal to the average monthly growth in the last two years, was enough to keep the unemployment rate steady at 7.8 percent, the Labor Department last Friday. But it was not enough to reduce the backlog of 12.2 million jobless workers, underscoring the challenge facing Washington politicians as they continue to wrestle over how to address the budget deficit.

Economically, we should continue to will feel the contrasting drafts of a retrenching uncertain government arm and a reviving private sector in 2013. The continued uncertainty of Washington will cause stiff fiscal headwinds during the first half of the year, stymieing growth for the first half. But by the second half, private business will continue their investment as well as bank lending and household spending on cars, homes, and the supporting industries.

Tougher mortgage lending rules
Tim Fisher, President of the Texas Mortgage Bankers Association, spoke about the future of mortgage financing, specifically rules and regulations put in place by the 2010 Dodd Franks financial regulatory bill. In short, mortgage lending isn’t going to get any easier. The upshot of this regulation is that banks are likely to narrow their loan offerings and rely more on thirty year fixed rate mortgages, a product unique to the US and one that has required a government guarantee. Currently, over 95% of all loans are backed or controlled by government backed agencies, which is something the Federal government would like to get away from.

The CFRB (Consumer Financial Protection Bureau) released new mortgage rules for qualified mortgages on Thursday of this week. The new rules come at a time when regulators and banks are trying to find a middle ground between overly lax and overly tight lending standards. For years the lending pendulum has never been just quite in the middle, either too lax or too harsh. 2013 looks like it will swing to the harsher side.

However, over a decade ago, mortgage lenders began broadening their base of customers (at the governments urging) by offering an array of exotic loan products with esoteric names: Subprime, Alt-A, low-doc and no-doc loans, and interest loans that required little to no verification or documentation to qualify. These loans went to millions of borrowers who ultimately couldn’t pay for them, and resulted in one of the worst financial crashes in the world in history.

The new guidelines and harsher parameters for both buyers and lenders will in all likelihood make it harder to qualify for a loan and from a lender standpoint, harder to lend. Because of this, mortgage lending will be a more difficult environment through 2013 – the bottom line is that it will be harder to qualify than it has in many years, slowing down home sales.

Eldon Rude, Metrostudy’s Director of the Austin market, discussed our local market and where it is headed for the year. Some of his major points were:

– The housing economy began to rebound this year both in absorption and prices
– Home sales, car sales, and retail sales are rebounding
– Real estate construction is underway. Drive around South Lamar, West Campus. Drive your new home   communities. There is a lot going on.
– More people working – as discussed last week, Austin at 5% unemployment is truly blessed. But then so is
  the whole of Texas, our state and major metros unemployment number continue to lead the nation

– Five years of pent up demand
– Americans have credit capacity again

Austin really saw the housing market continue its recovery in 2012, with strong increases in sales for both previously owned homes and new homes. Market watchers expect housing’s growth to continue through at least the next two years. But the industry faces challenges that include a still-shaky economy, a potentially tougher financial regulatory climate, and already-noticeable shortages in labor, finished lots, and building materials that will impede growth if they get worse.

That said, 2013 will be the year most remember as the first solid year of recovery for most of the country. Here in most of the Texas metros, consumers and realtors are likely to remember 2013 as the year when the real estate industry finally showed life after six years of dismal news.

Activity is expected to remain strong in 2013 as robust job growth, rising apartment rents and historically low mortgage interest rates result in more demand for housing in the Austin region.

Job growth
Driven by continued employment and population growth, the Austin economy should continue to outshine the rest of the nation. Analysts estimate that the region’s employment rate will experience a 3% growth rate while adding approximately 60,000 new residents annually over the next two years. This equates to around 30,000+ new jobs annually. This growth will bring Austin’s SMSA population to totaling over 1.9 million in total in the next two years.

Where is the job growth? While traditional employment leaders in Austin such as Dell and Advanced Micro Devices either contracted or remained flat in 2012, Apple, Samsung, Cirrus Logic, Intel, Mutual Mobile and Calxeda experienced growth. All have a part to play in the growth of mobile technology such as tablets and smart phones. This year Visa, Inc. announced that it was building a worldwide data center on Research Boulevard that is expected to staff almost 800 employees. General Motors is creating a 500 employee information technology center in Austin as part of the company’s push to use computer know-how to actively transform how the giant carmaker does business. 2013 should continue the streak of announcements improving Austin’s employment growth.

Because of this job growth, Austin’s rental market remains tight – this job growth puts pressure on development. In the last two years, the Austin apartment market has experienced strong increases in both rent and occupancy. As a result, rents have reached a historic high of $1.05 per square foot, and the current occupancy, at 96%, mirrors that seen during the heights of 2000. Annual figures show these numbers to be a 2.4% gain in occupancy and a 6.8% increase in rents. This leaves just under 4,000 rental units left for the 60,000 new Austinites when they move here. Even with the planned 8,800 units being delivered in the next 12 to 18 months, there is not enough units to house those moving here.

Limited inventory
As discussed above, not only have our local residential housing markets stabilized, but we have begun to see limited inventory in resales and new construction. Although it’s been a good year in resales (over 25,210 sold, nearly a 20% increase year over year) the amount of inventory currently offered in total is just over 5,700 units, 20 percent less than November 2011. Since this covers all price points this obviously is not enough to address demand.

New homes are just as challenged with lack of enough inventory. 2012 ended up at 7,981 starts, almost 700 more than previously projected. Eldon and Metrostudy are projecting the new home market could do as many as 9,000 starts in 2013 if there are enough ‘quality ‘ lots for the homebuyer.

The lack of developed lots and land continue to be the story for the Austin market. More housing starts in 2013 with less than an 18 month supply and little in the development pipeline. Remember it traditionally takes about two and a half years to buy a piece of land, get it entitled, and start construction of homes. So, anything bought today will take at least that long to come to market.

Labor and materials
Also limiting inventory is the construction labor shortage. This shortage is not only increasing the price of labor and putting pressure on margins, but also it is increasing the time it takes to build a house. The median labor wage hike nationally as well as locally is around 4+%, with a maximum of 15%. The slowdown and recession caused by the housing bubble forced many construction workers to move on to other jobs and put many production builder companies and subcontractors out of business. Labor will be more expensive.

In addition, because of the added demand materials are rising in price. The chart below shows how lumber has climbed as demand increased and the ability to increase production is not there. It’s not just lumber, all materials are seeing an increase in demand therefore putting pressure on prices. Don’t expect the discounted values of the last five years when looking for a home.

Construction and development costs will increase further in the time it takes to start and finish homes. A survey of builders locally, (and by no means scientific) shows that the average time it takes to start and finish a home in Austin, from start to finish, has climbed from four months to over five months. Some of the delays are being caused by shortages in the concrete and framing trades, causing problems in even the first construction phases. But not all of the start delays are being caused by worker shortages. It’s also taking builders longer to get permits because local municipal governments have cut staff. Getting first-time home buyers qualified for loans is another cause for delay. it has already begun to impact the time it takes to start and finish homes.

This is life on the other side of the housing crash. Home starts are climbing, prices are up, and builders can’t find enough workers.

Austin and Texas have been adding construction jobs since mid-2012, and some builders still can’t finish homes on time because framers, plumbers, and even cleanup crews are in such demand. Many skilled workers from before the recession have moved to better paying oil and gas jobs or moved back to Mexico. Potential new workers failed to get into the pipeline, because construction woes dragged on for so long.

As you can see by the chart below from Metrostudy, home prices in Dallas, Houston, Austin, and San Antonio have continued to increase.

Also compounding construction is that newcomers aren’t arriving from Mexico, at least not like in the past. They used to be a crucial labor source for the fast-growing business. Builders and subcontractors don’t want to be quoted on immigration, because it’s such a political issue, but they believe it’s a big factor in the labor shortage.

In April of 2012, the Pew Research Center estimated that net migration between the United States and Mexico had flattened and perhaps reversed from 2005 to 2010. In five years, slightly more people moved to Mexico, Pew said. A decade earlier, in a similar five-year period, almost 2.3 million more moved from Mexico to the U.S. Pew attributed the recent standstill to many factors, including the weak construction job market, tougher border enforcement, and a rise in deportations. As the economy picks up, the wave of Mexican immigration could resume.

Builders are hoping and counting on it. They’re OK with the labor shortage, partly because it’s better to manage a growing business. But they also hope it’s a temporary condition. As word spreads, they expect labor markets to respond, whether from the unemployed, other states, or Mexico.

Six years ago, housing starts peaked in Central Texas and then slowed. Only recently has the recovery looked solid and sustainable, so it actually feels good to have a labor shortage. Texas is ahead of the curve. While hiring here is up 5 percent in 2012, construction employment nationwide has been wallowing around the bottom for more than two years. As the market improves nationally, it will but pressure on raising labor prices which have been stagnant the last 6+ years, again adding to the cost of homes and construction.

There are potential hurdles this year. 2013 in Austin will start strong on home sales, but the rest of the nation will be slower through the first six months caused by the fiscal debate and the tightening mortgage climate. Locally, the availability of developed land and resale inventory will continue to be a challenge for buyers and another reason for sellers to raise prices.

Even with the hurdles mentioned, 2013’s forecast for Austin and the rest of the state will be head and shoulder above the remainder of the nation.