Markets find their own values

Texas and its metros continue to be singled out as overvalued by different sources. The map below from real estate analysts KCM, using CoreLogic numbers, shows when the states saw peak prices and how far they are from that pinnacle.

As you can see Texas is just now hitting the highest values they have seen in history. The seven states in dark blue are currently at their peak. Take a look at these states; are these the normal states you would associate with being overvalued? No. What those states show is demand for shelter outstripping supply. All have strong employment as shown by their low unemployment numbers: Wyoming (4.1%), Colorado (4.2%), Nebraska (2.6%), Oklahoma (3.9%), Tennessee (6.3%), New York (5.7%), and Texas (4.6%).

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Real estate values and local economies have not fully recovered in the majority of the nation. With only 2% of the nation recovered, people are flocking to areas with steady employment. How can you say they are overvalued? Again those markets that are seeing great job creation will continue to see values rise as new employees look for shelter.

Two trends from the previous real estate and housing boom were related to loose lending standards. New homebuyers could get mortgages they would not normally qualify for, and many of those new borrowers had to put down little or no money up front. Combining these two forces resulted in a massively leveraged housing market. This in turn encouraged a high level of speculation in certain markets with leveraged money. We saw the end result – a massive financial meltdown resulting from the flawed idea of ever-appreciating real estate and loaning money to unqualified applicants.

Good news from a financial side is this is no longer the case. This lower leverage may be the most important difference between the housing market today and the housing bubble because it reduces the risk of a major downturn. It allows the ratio of the total level of mortgage debt to the overall market value of real estate to be realistically valued. This adjusts the amount of leverage and debt in the housing market by the total size of the market.

The current ratio of real estate wealth to mortgage debt is around 44%. This is a lot healthier than the higher 63% of mortgages to real estate value of 2Q09. This lower loan to value ratio should allow financial markets to weather potential shocks to the system in the future. If highly leveraged real estate and high levels of residential speculation becomes popular again, it would be wise to proceed cautiously with real estate investments.

Affordability for Millenials

There’s been a lot of chatter regarding a recent Bloomberg report about the 13 cities where Millennials can’t afford to buy a home. No Texas cities made the list of 13, but Austin was close behind at #16. I can’t disagree with the article, but it has to be viewed in context. Cities that are creating jobs have the highest demand for shelter, which in turn increases prices. The alternative is a lack of employment and declining prices.

As you know, home buying is not just about shelter. Buying a home has traditionally been a way for young families to begin building equity and wealth. Saddled with student debt and facing grim employment prospects, Millenials have had difficulty gaining economic traction since the recession.

When I look at the numbers and demographics, the trend I see is that Millennials are waiting longer to have a family and afford a home. So if anything, the future looks bright for those in the housing / shelter industry. Rents locally have increased 70% the last 10 years. In the same time frame, residential appreciation has improved 35% to 38% in the same time period, and wages 10%.

Does this mean Austin and other job creating cities are ‘overvalued’? No, they are responding to demand, which in turn is caused by employment growth and opportunity.

How do lake levels influence lakefront property sales?

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2005-2006: Drought, this one with statewide losses of $4.1 billion. A two-year drought begins in 2007, with a brief respite in early 2010.

2010-2015: The current drought arrives. From October of last year to September 2014, rainfall averages just over eleven inches, making it the driest year in Texas history. Agricultural losses are estimated at $5.2 billion and counting.

Lakefront property sales can be influenced by the level of the lakes. However, don’t think you can sell over market value with lake view becoming lakefront again. We went back 40+ years and saw very little difference in overall values for waterfront, drought or full. The slide above shows the last 10 years. What we did see is that when lake levels return to full, waterfront begins to sell with greater velocity. When there is a drought, sales dry up.

The graph shows median values are better when the lake is full, but waterfront values don’t get a premium when the lake is high. No one wants to pay top dollar for a dried up dock with no guarantee that they will ever have a true waterfront again. We have seen this drought happen many times over the last seventy years with lake levels returning to full and falling again. With lakes closer to full, sellers are not as willing to negotiate due to more buyers interested.

Those who think that values should increase with the lake currently at 80% full should consider the opposite scenario – is the property only worth 80% of its value when the water line recedes in the drought?

No one knows when Lake Travis, originally a flood control reservoir, will be full. I have yet to find anyone who is willing to bank a large investment on this assumption. I would think when lakefront is in a drought, it is probably easier to negotiate a sale due to the emotional value of waterfront and the consumer that thinks values are lower due to the lack of water. Each market finds its own value.