Current home buying conditions are the best in thirty years

If you have been paying attention, you know the real estate industry has turned up from its bottom. The three factors needed for such a transition include demand, supply, and investment. Job growth is coming back slowly nationally, and in Texas our metros continue to outperform the rest of the country. Renters are realizing the favorable buying conditions. With rents escalating in Austin and the other metros, how could they not?

New home construction is improving and in most metros REO inventory is a non-factor. As for the investment situation, lending and mortgage rates and real estate values have improved dramatically since 2007/2008, when Texas saw the bottom of the market. All of this has created the best buyer affordability conditions in about thirty years in our state.

If you look at history and the economic factors in Texas, we are past the bottom and leading the nation in job creation. This recovery will take longer than anyone wants, but the upside of investing in real estate and housing right now is that this is about as low as you will ever see in the foreseeable future. A lack of “desirable” lots for residential, apartments, office, and retail in the major metros puts pressure on our supply. As you have read in the media and as this newsletter has stated: supply is dwindling, values are stable, and appreciation will continue.

So what are the factors that make for a good housing and real estate market?

Lending rates are at historic lows

These are the lowest rates have been in the last fifty years (for baby boomers, the lowest we have seen in our purchasing years). Why is this significant? Affordability! Whether you are looking to purchase or refinance, there is not a better time. But the overriding factor is affordability. You would think today’s mortgage rates of near 3.875% to 4% would bring happiness (lowest rates since 1950). Instead, some see the low rates as a sign of weakness in housing and the economy weakness, a measure of buyers’ difficulty in getting mortgage loans and/or an indicator of coming deflation. With mortgage rates declining, affordability rises, meaning lower payments to buy that desired house or investment property. Rates are projected to stay low through the end of 2013, early 2014; however at some point they have to go up. Remember the ‘12% rule’. Every time interest rates go up one point, you lose 12% of your buying power. (The opposite is true if they go down.)

The historical perspective

Starting around 4%, rates moved up through the 1950s. Then, in 1959-60 homebuyers got a taste of 6%. People did not like that rate – it was affordability in reverse. Plus, many mortgages couldn’t be refinanced at a lower rate without a penalty payment, so buyers hated getting stuck with the higher rates. The next five years of mid- to high-5% interest rates were palatable, and then they took off in earnest, eventually topping at over 18% in 1981. Ten years ago, consumers thought that rates of 6% were the lowest rates that we would ever see again. Comfortably we can tell you that rates will never be this low again!

When you are looking at buying a house or a piece of property, it is neither the interest rate nor the house price is the deciding factor – it’s the payment. Big ticket purchases like houses and investments typically require long-term financing. And this means the affordability of payments is the key concern for both buyers and lenders. In turn, payments are affected by interest rates, particularly for long-lived loans like 30- year mortgages. Seemingly small shifts in the interest rate can produce sizable changes in affordability.


For example, borrowers who might have refinanced once in the past 3 to 5 years months and have 30-year rates in the 5%-5.25% range, should do so again given the drop to current lower rates. Given the narrowing in the jumbo/conforming spread, some jumbo borrowers might also seek to refinance, as might adjustable-rate mortgage borrowers who might prefer to move to fixed-rate mortgages even though their rates are adjusting downward.

If you have not bought or refinanced in the last 2 to 3 years, there is a good chance that you can save 15%, substantial savings today.

So…affordability is an important factor to watch. Many buyers have already taken advantage of the lower rates. It is a well-understood and visible stimulus to act, one of the major reasons the Federal Reserve has kept rates low.

The question is, with homes and rates so affordable, what are the chances to see continued improvement not only in Texas but across the rest of the country this summer and on into 2014?

The amount of market inventory is lacking, do the math. This in turn makes the Texas metros markets prime for:

Investors: Investors will continue to grow in numbers as they realize housing and real estate are the best risk-adjusted return on their money. Real estate continues to be one of the most undervalued assets available.

Boomerang buyers: Foreclosed homeowners, who are currently renting homes, will come back in droves. There is not a more affordable time to buy in the last 60 years!

Entry-level buyers: First-time homeowners, who have been sitting on the sidelines for 6+ years, waiting for a sign of the bottom are looking at price increases in their desired neighborhood and are rushing to become homeowners.

Move-down buyers: Empty nesters and retirees, who have seen their equity return in their existing home, are buying a home that is more suitable to their current lifestyle, which may or may not include adult children as well as their aging parents. Almost all of the Texas metros have seen a larger portion of this market show up in the last year.

Moveup buyers: The price appreciation that occurred in the last year has already lifted 1 million underwater homeowners above water nationally, and future price appreciation will lift it even more. The consumer who has been sitting on the sidelines is back buying across all price points due to the affordability factor.

People still want to see the negative portions of the market. Don’t listen to the naysayers. They frequently make one or two negative points, which may be valid, but they don’t understand the big picture.

• Housing is cheap, probably the cheapest many will see in a lifetime hopefully.
• People prefer to own
• Get ready for a surge in home prices!
• Most Texas housing is transforming from cost driven pricing to market driven pricing and will continue in through 2014, just due to the lack of inventory.

What is the difference between a recession and a depression?

There is an old joke told by economics professors: A recession is when your neighbor loses his job. A depression is when you lose your job.

The difference between the two terms is not very well understood for one simple reason: there is not a universally agreed upon definition. If you ask 100 different economists to define the terms recession and depression, you would get at least 100 different answers. We will try to summarize both terms and explain the differences between them in a way that almost all economists could agree with.

The standard newspaper definition of a recession is a decline in the Gross Domestic Product (GDP) for two or more consecutive quarters. This definition is unpopular with most economists for two main reasons. First, this definition does not take into consideration changes in other variables. For example this definition ignores any changes in the unemployment rate or consumer confidence. Second, by using quarterly data this definition makes it difficult to pinpoint when a recession begins or ends. This means that a recession that lasts ten months or less may go undetected. Not unnoticed, but undetected.

The Business Cycle Dating Committee at the National Bureau of Economic Research (NBER) (could they have come up with a more boring or ‘nerdy’ name?) provides a better way to find out if a recession is taking place. This committee determines the amount of business activity in the economy by looking at things like employment, industrial production, real income and wholesale-retail sales. They define a recession as the time when business activity has reached its peak and starts to fall until the time when business activity bottoms out. When the business activity starts to rise again it is called an expansionary period. By this definition, the average recession lasts about a year.

So are you confused yet?

Before the Great Depression of the 1930s any downturn in economic activity was referred to as a depression. The term recession was developed in this period to differentiate periods like the 1930s from smaller economic declines that occurred in 1910 and 1913. This leads to the simple definition of a depression as a recession that lasts longer and has a larger decline in business activity.

The difference

So how can we tell the difference between a recession and a depression? A good rule of thumb for determining the difference between a recession and a depression is to look at the changes in GDP. A depression by economic definition is any economic downturn where real GDP declines by more than 10 percent. A recession is an economic downturn that is less severe.

By this yardstick, the last depression in the United States was from May 1937 to June 1938, where real GDP declined by 18.2%. Using this method, the Great Depression of the 1930s can be seen as two separate events: an incredibly severe depression lasting from August 1929 to March 1933, where real GDP declined by almost 33%, a period of recovery, and then another less severe depression of 1937-38. The United States hasn’t had anything even close to a depression in the post-war period. The worst recession in the last 60 years was from November 1973 to March 1975, where real GDP fell by 4.9%. Now you should be able to determine the difference between a recession and a depression without resorting to the poor humor of economics professors.


The good news is that in late 2008, the national GDP turned positive and has continued that streak for almost 15+ straight quarters.

Opportunity Austin 3.0 was launched this week

I know that our readership extends beyond the Austin area, so this isn’t to rub salt into the wounds of those metros that are losing companies – but this public/private partnership is a blueprint of how to recruit companies and stabilize your local economy.

The partnership is made up of 14 different metros and over 330 corporate and individual investors. From 2004 to 2012 the partnership has created 174,800 new jobs and a payroll increase of $8.7 billion. The partnership has been broadly based, allowing the Austin economy to be better protected from the downturns of the economy. This was not true in 2001 during the tech bust.

It has allowed Austin to lead the nation with a 26.5% increase in jobs over the eight year period, leading the nation in employment growth per capita. During this same period the other Texas metros faired well, too. Houston had a 19.4% increase in jobs, San Antonio a 16% improvement, Fort Worth with a 14.4% increase, and Dallas 12.7%. if you look at the economic charts of the US vs. the Texas metros, you will notice that Texas was last into the recession and first out. Austin’s growth has not happened by accident.

Austin purposefully also recruited ’clean’ industry helping make the city more attractive. Each year, including the dismal economic year of 2009, new jobs were created. 36 states and 28 international areas lost jobs to this recruitment – something that has made the rest of the world take notice.

Not only has this program been successful, it has been done cost effectively with less incentives offered than the other Texas metros. Here are some refutations of common objections to incentives.

‘They’re used all the time’

Out of 254 company relocations in Austin, incentives have been used 13 times. Realize incentives are part of the corporate recruiting process. They have been here in use since the late 1800’s in the US to encourage industry to stay, relocate, or invest in a location. The reasons are obvious. Without jobs, you have no people. With no people, you have no cities.

‘It costs the taxpayers’

Incentives are tied to the tax base. A municipality’s economic development objectives are to increase its tax base, create jobs, and stimulate the local economy by encouraging new business activities or expansion of existing business activities. These business activities result in an infusion of construction capital, the inflow of money from the purchase of goods and services, increased payroll dollars circulating in the local economy, and an expanded tax and fee base for the community. The added diversity of the business mix also makes the community more attractive to residential and economic development prospects.

Incentives involve no cash, and are tax abatements

‘Reduction of or exemption from taxes granted by a government for a specified period, usually to encourage certain activities such as investment in capital equipment.’ All incentives this analyst has seen are tied to benchmarks. No abatement is given without the corporation reaching strict economic measures – wages paid, jobs created, buildings constructed, etc. This is regulated both by the municipality and the state government. It is not given out of a back room frivolously.

‘The company would have come anyway’
We hear this argument all the time, and it typically just isn’t true – just ask Albuquerque, where Microsoft was founded. Washington’s relationship to the founders helped, but incentives helped even more. Texas and its metros have lost numerous corporate relocations in the last few years due to our ‘incentive package’ was not as robust as other states or countries. Go to each city’s Chamber of Commerce or economic development sites to see what companies they lost. Austin is very open about what has been gained or lost. Yes Austin, San Antonio, Houston and D/FW are all desirable locations in their own right, but corporations look at the bottom line, and incentives help.

If you want to continue to see your metro grow, then this type partnership bears review. If you want to get involved, call the Chamber. Either way, this is a great blueprint of how to recruit jobs.