It would be great if I was right all the time. Unfortunately, only my wife is right all the time. That being said, it is the time of year where we look back at the previous year, confirm those things we forecast on, and report what has happened and where the regional real estate market is headed. Let’s look back at the metro markets for the first part of 2014, and see where the Texas regional markets are headed.
Texas metro areas are still seller’s markets. The first half of the year was strong, mirroring the intensity and positive real estate psychology of last year. 2013 was the year the Texas metros felt and saw the recovery. All major Texas metros had more demand than inventory, allowing values to improve. Looking back at the recession, late 2010 is when we began to see positive traction in the markets, but it wasn’t until last year we saw significant change in consumer psychology. Last year, we saw homes in Austin selling in a matter of days, often above the asking price and paid in cash. This year, particularly after the first half, this is no longer true. Buyers are more selective, and taking their time.
Values are still strong, and showing no softness and sellers may see multiple offers if priced correctly. For buyers this means that negotiation will have very little impact on the price. However, any property that sits from more than 60 days is probably overpriced. If you are a seller, the market is not as robust and the buyers not nearly as desperate as last year.
Cash is still king. All-cash sales accounted for 37.9 percent of all sales of single family homes and condos nationwide in the second quarter 2014, down from a three-year high of 42.0 percent in the previous quarter but still up from 35.7 percent in a year ago. Sales to institutional investors – entities that purchase at least 10 properties in a calendar year – accounted for 4.7 percent of all sales of single family homes and condos in the second quarter, down from 5.3 percent in the previous quarter and down from 5.8 percent a year ago to the lowest level since the first quarter of 2012.
Apartments continue to be in high demand, even with the near record number of new communities being built. These newly constructed apartments are being absorbed with no rent concessions. Vacancies in all Texas metros are above or near 95% for multiple years now.
Residential real estate shows little to no signs of slowing, due to demand and job growth outstripping supply through 2016 in all regional metros. The fear of losing one’s job has decreased dramatically, particularly in Texas. Labor shortages and increased wages is a bigger issue.
Chief Executive magazine has ranked Texas as the best state for business for ten straight years. Texas has tremendous economic momentum in 2014 based on GDP growth, job growth, real median household income growth, and current unemployment.
Because of the booming economy, commercial real estate channels are doing well. Retail, office, and industrial all exceed 90+% occupancy. Most are closer to 95%, attracting equity from all over the globe. The good news is that Texas businesses continue to be conservative in their management and expansion, due to the memories of both the ‘oil bust’ in the 90’s and the ‘tech bust’ in 2000.
The economy is cyclical and goes through stages of expansion, contraction, stabilization, and recovery. Just like in the Lion King, all hard assets experience a “Circle of Life”.
As a market, the majority of the nation is in a stabilization or recovery stage. However, the vast majority of the Texas region is in ‘expansion’. Here is a brief explanation of these stages:
Historically, the Federal Reserve lowers rates to avoid a recession and housing starts and job growth follow. Texas and our metros have left this stage a couple of years ago. Key risks are that lending rates near their lowest values in recorded history have not stimulated the market aggressively enough. As a state we are only at about 40 to 50% of previous sales.
In normal times, supply and demand is in balance and home appreciation meets or beats inflation. The real estate and finance market has suffered one of the most traumatic housing price declines when the bubble burst in 2008. This did great damage to consumers’ psyche, with many families losing tremendous equity due to the market collapse. Here in Texas we were spared the brunt of this. The brunt of this damage (55%) was in only 32 counties nationwide. But suddenly the ‘American dream’ of owning a house was put on hold. Baby boomers who had always known a wealthier lifestyle than their parents suddenly had concern about losing that dream. Younger generations saw their parents plight and questioned whether the ‘American dream’ was achievable or not. This led to slower household formation and housing and consumer demand, which in turn affected the speed of the recovery.
In a normal cycle, economic activity pushes demand to overcome supply, including household formations. Stronger inflation is one of the byproducts of the expansion stage. Historically, the Federal Reserve has raised rates to slow inflation. However, in this last cycle the above average housing investment (speculation and subprime lending) exacerbated the contraction and recovery. Both industry and employment growth have been slower in their recovery compared to previous recoveries, pushing real estate values and net worth down. Texas did not have the speculation and dramatic depressed values that the majority of the country had; therefore we are seeing tremendous expansion and construction activity.
Currently the whole region is in an expansion stage with large and small businesses relocating to the Texas region, as well as regional companies expanding. Because the Texas region is in ‘expansion’, many of the metros and smaller cities are on numerous ‘best’ lists. This in turn puts pressure through 2016 on supply.
Contraction is the completion of the ‘circle’. A ‘buyers market’ prevails, with reduced construction and supply outstripping demand. Texas had a tremendous contraction in the late 80’s / early 90’s, which wiped out a whole lending industry, Saving and Loans. Real estate regionally was $0.10 on the dollar. It took close to a decade to recover. Austin and Dallas suffered a smaller contraction in the ‘tech bust’ in early 2000s.
Where we are now
The region is almost three years into this positive run. Six years is the longest positive run we have had in the last 70+ years. That said, there is little concern presently in almost all economic channels of a contraction anytime soon based on supply and demand and job creation.
With all of this, 2015-16 will continue to see expansion, but not as robust as 2013. Most real estate industry experts and forecast low inventory levels across all channels with increased demand and values. With increased demand we see stronger competition as equity and outside regional players look to gain a foothold in our region. A great example of this is the 25+% increase in Realtor licensees regionally.
In this expansion stage, we are seeing entry level housing in Texas metros (below $200,000) becoming nonexistent due to land, labor, and material values escalation. Because of afore mentioned cost increases, builders and developers are constrained to respond. Other than a dreaded contraction phase, to improve the capabilities of entry level our municipalities need to look at development regulations and economic impact. More regulated markets are more expensive. Secondly, smaller lot requirements need to be considered to allow younger generations to buy nearby.
Regionally other real estate channels continue to attract equity. Proper pricing will be paramount, while paying attention to levels of inventory. With energy prices dropping, Texans should be concerned. Most fracking cannot be profitable when oil is under $70 a barrel. Should oil value drop to that level, it would have an immediate impact on the majority of real estate channels. However understand that many global powers would have larger economic issues if oil dropped to that level.
With the Fed ending quantitative easing, this next year we should see rising mortgage rates. The Fed has shown reluctance to allow rates to increase until the rest of the nation finds its economic footing. Rates should increase this coming year to some extent, but in a year’s time, I think most analysts would be surprised if they went more than a point higher. These are the second lowest rates have been in generations.
Historically, a rise in rates slows economic growth for a couple of months, until people realize rates aren’t going back down. We should see some hesitation in the markets should rates rise. The continued concern over harsh lending penalties will keep many consumers on the sideline while the economy waits. Remember lenders are in the business of lending. The continued harshness does not help their bottom line.
There seems to be a lot of confusion and unanswered questions for those seeking a home mortgage. This is due to changing regulatory standards from Congress, the administration, and the Consumer Financial Protection Bureau. Lending standards are still changing. With the subprime mortgage debacle in recent memory and the current commercial loan issues, lenders will continue to require stellar credit and thorough documentation from borrowers. It is even more important to work with your lenders on preparation of what you need and how the contract should be written.
The bottom line is that regionally and nationally it continues to be a seller’s market, with 2015-17 showing continued strength based on current demand and inventory. In Texas, 2015 looks to be another year of improving home values and constricted inventory. If you are waiting on the market to falter, it could be a number of years before you see home values, lending rates, and affordability at this level. It is safe to say that other than the last 3 years, this is the best opportunity for buyers to purchase.