The media is pushing that the U.S. housing crash is over and the market has turned. Has it?
In the Austin SMSA, yes. In Texas, three out of four metros have turned. The national market is not quite there yet. Nationally and locally there are still some challenged areas. In all Texas metros, outer rim communities are still 12 to 24 months out from recovery.
The average U.S. home price nearly doubled between January 2000 and April 2006, according to the Office of Federal Housing Enterprise Oversight, and the average has fallen about 35%. The drop was 53% in the Las Vegas metropolitan area and 39% in Miami, where about a quarter of all households with mortgages are behind on their payments or in foreclosure. The value of your home might be determined more by whether the neighbors keep their jobs than whether the house has ample light, good closet space, and a yard large enough.
There was some positive news for the economy and real estate this week:
The housing sector continues to improve slowly. Nothing tremendous, but positive. Some of the gains in house prices may be due to a shifting mix as fewer distressed homes are available. But firmer prices are good news, even as the mix of houses for sales begins tore‐normalize. But realize these are small improvements, with much ground to cover and very tentative improvement nationally. In my opinion, a couple of weeks of positive reports is not enough to be considered a trend.
When you start at zero percent or less, any positive movement speaks volumes. A great example is Phoenix. That market is still challenged with over 45% of resales being short sales or REO’s. Values have stabilized yet they still are challenged by the number of potential foreclosures and short sales. So if anything, this positive view is tentative at best in the challenged markets. The nation still has a long way to go to reach full employment again. Job creation has been frustratingly slow since the Great Recession ended – only 43 percent of the jobs lost (8.3 million) have been regained 34 months later.
Here are some thoughts as we move into the coming year.
Is Texas real estate that great?
The Texas metros are actually that good. Houston, San Antonio, Austin and Dallas are frequently cited as some of the best place to live or for companies to relocate to. Austin, San Antonio and Houston all have gained the jobs lost during the recession and then some. The residential sector is tight, and office and retail are looking much better. (Nationally, office and retail are still challenged.)
Office absorption is a good sign of economic growth. To put the Texas market in perspective, here’s a comparison of Class A office absorption according to CoStar for the first half of the year, measured in square feet:
San Antonio 482,037
New York City 535,933
Los Angeles 601,575
San Francisco 757,404
Oklahoma City 1,561,320
The state that is creating one out of four jobs in the nation is reaping the benefits of a strong jobs economy. It’s not very often that San Antonio and Austin come within 50,000 square feet of the office absorption of New York city.
Is the national housing market getting better?
The national market has shown signs of healing this year and particularly this week, but the much-touted recovery is still tentative and fragile. Realize that the numbers reported in Case-Shiller and other indexes is a minute amount comparatively to the potential shadow inventory.
We all know the story of how the nation got here. Supply and demand got way out of whack during the boom, thanks to easy credit and a surge of buyers who overspent and over borrowed causing speculation and borrowing against that speculation. With too many buyers, demand for homes became unnaturally high, which led first to soaring prices and then to an excess supply of homes as builders responded to the huge demand. We’re now returning to some kind of equilibrium, with all that excess supply and a sudden shortfall of demand driving prices in the other direction. This had to happen, and in the long run it will make homes more affordable for people who were priced out of a hot market at the peak of the boom.
When I speak of this boom and speculation, remember that the Texas metros never saw the speculation the sand states had. Texas had the least appreciation of any state during the boom years according to the Office of Federal Housing Enterprise Oversight. Why? Texas experienced a real estate and oil based crash in the late 80s, which is one reason why banks and builders were conservative in Texas when their counterparts weren’t elsewhere.
We’re closer to prices that are real and therefore sustainable.
The faster this process works itself out, the better. One lesson of Japan’s “lost decade” in the 1990s (which American economists are now intently studying, as they’re worried the same thing might be happening here) is that letting deep financial problems fester can produce chronic stagnation that’s worse than a recession. So far, American policymakers have been more aggressive than the Japanese were at identifying and dealing with the worst problems. The housing bust is surely one of them, and at this point tough love is probably the best medicine.
What does that have to do with what is happening in Texas?
First, the good news is that we are in Texas. Second, Texas weathered this type of economic meltdown in the late 80s and early 90s. They didn’t beat us or eat us – we came out better because of it. Thirdly, Texas has had a phenomenal job creation run. CEO’s and corporations have listed Texas as their number one destination for the financial dynamics of the region and the favorable tax burden. Its undeniable we have had a pretty strong run the last few years in creating jobs. Because of what happened nationally, we have a regional market where there is not much inventory You have a limited supply of developed residential lots on the ground. With inventory so controlled, there is opportunity for the right priced and located product.
Nationally, consumer demand for homes remains low. Why? A lack of confidence, and a lack of jobs. An analysis by the forecasting firm IHS Global Insight shows that only four states have returned to their peak prerecession employment levels (Alaska, Texas, Louisiana, North Dakota). The optimistic report says that 16 states will regain peak employment by the end of next year, and that all but eight will do so by the end of 2015. Nevada, Michigan and Rhode Island are expected to be the laggards, not achieving peak employment until after 2017. According to the latest FHFA home price index Texas has the best performance over the last five years. The difference in Texas and our metros is the amount of positive job growth.
So if not now, when will housing bottom out?
If I could predict that, I would be a very rich man. We never know exactly when bottom is until afterward and there probably won’t be any clear turning point (it took economists and analysts eighteen months to officially say the “Great Recession” ended July 2010). Monthly indicators, such as home sales and prices, tend to bounce erratically from month to month, making it hard to discern the underlying trend. And the housing bust will end at different times in different places. House prices already have bottomed out in the coveted infill areas with short commutes into town such as Tarrytown, Barton Hills, and Circle C in Austin, and similar neighborhoods in San Antonio like Alamo Heights and Terrell Hills. But it probably will be years until all of the unsold condos find buyers in parts of Florida. Generalizations about states or metropolitan areas don’t say much about what is happening in your neighborhood. All real estate is local. In the Austin, San Antonio, and Houston area we see the positive movement particularly the last six to eight months, with some areas stable and improving and others still tentative.
There will be more foreclosures to come nationally.
First, realize that 55+% of all foreclosures nationally are in just 38 counties. Though more homes will go into foreclosure in 2012/13, some homeowners will and are able to lease back their property at market rental rates for a year’s time, allowing more people to stay in their homes longer. The stabilization of the national market value is important as Texas continues to attract more immigrants from other states. Close to 25,000,000 people will move to Texas by 2030 (US Census Bureau).
What signals should I watch to determine whether my local market is improving?
One way to get a sense of supply is to ask a good local real estate agent for stats on how many homes are listed for sale in your town and how many months it would take at the current sales rate to absorb that supply. Anything over six months generally is considered high, meaning that sellers might have to cut prices (a ‘buyers’ market’). Another way to get a sense of a neighborhood’s health is to count the number of for sale signs and vacant houses. If there are more than a couple vacant homes in a block, then that might be a bad sign, particularly if no one is taking care of them (also remember that foreclosures happen in clusters).
The supply of homes listed for sale has fallen sharply in some areas, but the supply is likely to balloon again in many areas with a renewed surge in foreclosures. Foreclosures are something to watch in all markets. Foreclosures have an obvious effect on values and with the added focus on appraisals they are an important portion of the market to watch.
However, Austin, San Antonio, and Houston have not experienced the rate of foreclosures we see in other markets across the nation. Why? We never saw the rapid appreciation that other markets saw, therefore we did not see the same overleveraging of assets. Although foreclosures are always a concern, they have represented less than 0.1% of the units in our market. Out of 358 metros, Austin had the fewest foreclosures nationwide according to Realtytrac. Nationally, the outlook for home values is good, particularly in Texas, with a rise in home prices since 3Q of 2010. Nationally, however, many markets are a long way from full recovery.
What drives demand? The media quotes so many indices and seems to have a new concern every day.
Demand depends heavily on the job market, so the answer is job creation. The U.S. Bureau of Labor Statistics provides unemployment rates by metropolitan area. In June, they ranged from 2.8% in Bismarck, ND, to 28.7% in El Centro, CA. State and local agencies provide job market data, too. Help wanted signs can be a useful local indicator; if you start seeing more of them around your neighborhood, then that is a sign that business in your area could be starting to recover. When you look at national rates compared to Texas and Austin, you realize how remarkable our market is. Austin continues to defy the odds by having a rate of at 5.9% unemployment, while the U.S. is at 8.1% and Texas is at 7.1%.
When is the timing right to buy a home?
When you can afford it. Whether you are buying your first home or your last, it is important to understand what costs are involved. Get with a Real estate and mortgage professional to understand what is available in the market. If you are asking is now the time to buy? Absolutely! Affordability is the best it has been in forty years. Bank and mortgage rates are the best we have seen in over sixty years. Economically, this type of uncertainty in the market is when you buy. It is a buyers’ market. Locally values have been stable and have seen little to no deterioration (if you bought your house in the last 2 to 3 years, appreciation is typically not going to cover closing costs in addition to appreciation).
If I’m renting, is now a good time to buy a house?
It may well be. Prices in most areas are well below their peaks, and most in Texas have hit bottom and turned. Don’t kid yourself that you can time the bottom of the market perfectly. In many parts of the country (sand states for example), consumers don’t feel any pressure to buy in a hurry, because the supply of housing seems likely to remain ample for a number of years. However, in Texas inventories are tight, both on new and resale, and values have remained stable. Most likely the home you look at today will be gone and/or more expensive next year. Economics 101 – supply and demand.
Generally, it doesn’t make sense to buy unless you expect to remain in the house for at least four or five years, because the transaction costs — including commissions for real estate agents and mortgage fees — are heavy. And the last few years was clearly a good time to rent. Many landlords needed tenants badly. However in Austin, even with over 12,000 new units coming on the market over the last two years we have not seen
vacancy decrease. There are less than 3,500 rental units in a five county area for 60,000 people moving here annually. Houston and San Antonio report the same strong rental market and rents have increased. Single family rentals have tightened up dramatically over the last year in Texas (usually a sign of pent up demand when the economy shows positive growth). Rents have begun escalating, which is usually a good time to look at buying also.
How can I figure out the value of my home?
First you should talk to a real estate professional. Ask your friends and peers who they would recommend, but try not to go with a relative or a friend. You want someone that sells more than twenty homes a year. You never know for sure what a home will fetch until you put it on the market, and
then it is partly a matter of luck. Will the eager buyer who shares your taste in home style and neighborhood show up on day one or day 200? Some web sites — including Zillow.com, HomeGain.com and Cyberhomes.com — provide estimates of individual home values. These estimates are largely based on recent sales of nearby
homes, and in some cases they are wildly off the mark. But they often provide a ballpark idea of a home’s value.
You might come closer to the real value by talking to a local agent and looking at recent prices for homes that you know are very similar to yours. If you want to be more scientific and don’t mind paying $250-300+, hire a professional appraiser.
Can I get a mortgage on attractive terms? YES!
Rates have been kept artificially low, with the lowest rates in sixty years. Will we see those again? Not if the economy continues to improve. However, today’s current rates as well as what has been forecast for the remainder of the year are the most affordable in years. So should you wait? Absolutely not! You will not see affordability at this point again in all likelihood in your lifetime. Now is the time to buy, if you have a good credit record, a moderate amount of debt in relation to your income and the ability to fully document your income. That last requirement is fairly easy for people who work for a salary and have had the same employer for more than two years, but it can be tough for self-employed people with incomes that vary substantially from year to year. A borrower with a strong credit score of 740 or higher (on the scale of 300 to 850) and the ability to make a down payment of at least 20% could get an interest rate of about 3.5% with no origination fees on a 30-year fixed-rate mortgage.
More buyers are entering the market.
The population of Austin, San Antonio, Houston, and D/FW will continue to increase. New jobs are already being created at a quickened pace, feeding the desire for more people to relocate here. Rentals (single family as well as multifamily) have tightened up dramatically over the last twelve months. Rents have been increased, concessions have gone away. More and more apartment sites are being tied up, with most of the top sites are under contract as rents begin to escalate.
Tricky appraisal rules.
Due to the government’s Home Valuation Code of Conduct passed in May 2009, property appraisals will be more expensive and take longer, sometimes hindering (or breaking) real estate deals. It is important that you talk to your lender before you write the contract. There are some things that can help.
A conflicted construction market.
Regional lenders are financing new housing projects for builders or developers, there’s a chance of double digit increases in new construction through the end of the year and into next year (according to the McGraw-Hill Construction Outlook Report). Once demand picks up, material and labor costs will rise appropriately.
Without a doubt, we’re all ready to hit the bottom of this barrel, and although experts can take educated guesses at when the real estate market will start to recover, many times we can get a more accurate look just by paying attention to what’s happening in our own community. Look for clues in employment and the real estate market in your community to decide if it’s a good time to buy, sell, or just stay put for a little while longer. Based on the factors above, has the housing market in your community hit bottom yet? Or does it still have a long way to go? If you live in Texas, you should buy now!