Resales soar, while new construction lags

Austin and San Antonio are at the forefront of a home market that is seeing rapidly accelerating sales and activity. However, new home construction is still lagging, due to a lack of desirable lots. There are 15,200+/- developed lots on the ground in Austin, and over 12,400+/- are under contract. San Antonio suffers under the same scenario, with limited developed lot options. With this continued limited development the market will continue to be a challenge for builders. Low resale inventory and high affordability continue to drive the market at all levels. These are all signs of a thriving market driven by great job creation.

Last week, there was a chart posted on the Calculated Risk Blog showing how weak new home sales are relative to existing home sales. This is significant because the economic impact of a new home sale is about seven times greater than a resale. When a home is built, all that labor and their spending stays local, generating a greater “dollar bounce”. The framer, the foundation guys, and the plumber each support numerous business downstream that a resale has little to no effect on. In a healthy housing market, new homes should be 25% of the market.


Source: Calculated Risk

Let’s look at an explanation as to why builders are not capturing the business they have had in the past.

Lack of flippers

Nationally, regionally and locally, the reason that new home sales are still down 60% from the peak while existing home sales are only down 25% is due to the exit of the private and institutional “buy to flip/rent” investor. Texas never had much of this, because of the lack of discounting and low appreciation regionally. Remember Texas was 50th in appreciation during the boom years. We have moved up to 42nd. It is hard to spend money flipping when your appreciation is eaten up by commissions and other hard costs. Long term hold is what most residential investors find in the Texas markets. This slows down the flipping mentality seen on TV and what most of us think of.

Builders participated in this by letting individuals buy homes (sometimes in multiples) and sell the contracts before closing. They were not concerned about job creation formulas vs. home starts. The old formula is two new jobs to one home start. Anytime in the last 50 years when we have seen markets get outside this formula, speculation eventually causes the market to crash. The rate of appreciation needed to justify flipping just is not available in Texas markets. Traditionally flippers are looking for 20 to 30+% discount of pricing when active in a housing market. Texas metros never saw this type of discount.

At the end of 2012 and the start of this year there was lots of discussion of equity groups pursuing large amounts of short sales and foreclosures. Most have quit pursuing residential due to the lack of opportunity and yields. And with foreclosures/short sales down up to 70% from the top of the bust I think it’s safe to say that investors will turn into sellers soon.

Plenty of development

Those markets that had speculation had plenty of development happening; Las Vegas, Phoenix, Southern California, Florida, and Atlanta. All those metro markets were experiencing 50,000 home starts a year and 80,000+ lot completions annually. Today it is less than 10% of that, well in line to jobs being created. However because of the boom years most have plenty of developed lots to digest. It makes it hard to get great appreciation with ‘too much’ supply.

Lack of development

As the chart from Metrostudy shows Texas metros are low on developed lot inventory (24 months is considered equilibrium). All of them except Austin can address the inventory quickly within the next 18 months with new development. Austin however is another story with development entitlement taking 2.5 to 3 years. Translation – the Central Texas market will be a challenge for builders over the next 3+ years.


Source: Metrostudy 2013

Double Count Flipping

In those speculative markets, it is very important to note that “flipping” meant that existing home sales were being counted twice in a year in many cases…the first time when the bank REO or short sale is done, and the second 3-12 months later after it’s been rehabbed/remodeled. This could be boosting existing home sales by 3-5% per month. When you “flip-adjust” the past year of existing sales they are not so spectacular either.

Overcounting distressed market values

The distressed market — now at six year lows in terms of volume – was responsible for a large percentage of the existing house price “appreciation” we saw and are seeing. That’s because when you are able to buy a distressed home for $150k, put $50k into it (cost basis $200k) and resell for $230k, the popular price indices — included Case-Shiller if owned over 6 months by the investor — pick it up as $80k “appreciation” when in fact it’s only $30k…and a questionable $30k at that. (I have written about the shortfalls of the Case-Shiller Index; see our March 2, 2012 edition on the Independence Title blog).

Bottom line, the distressed market was “the” housing market for years. It’s what everybody looked for and wanted. It has been absolutely responsible for the squeeze in home values over the past 5+ years and a large percent of house price gains (of course, the 30-year fixed mortgage rate being forced down in QE3 from 5% to 3.5% was worth 15+% to house prices as well). And the artificial lack of distressed due to loan mods, new anti-foreclosure laws, and perma-foreclosure timeline extending — coupled with rates back to pre-QE3 levels — will be responsible for “Hangover 2″ that follows as history will show us.

The ‘distressed market’ has never been a major portion of the Texas region’s sales. DFW of all the metros probably comes closest with only about 10% of the market being distressed at any one time. Why have foreclosures been such a small part?

Judicial vs. non judicial

Before we answer and look at 2013, let’s look at last year. In 2012, the housing market experienced a tale of two markedly different foreclosure patterns. Twenty-five states welcomed decreases in foreclosure filings including some of the hardest hit markets of the downturn. Among them: former foreclosure capital Nevada (55% decrease compared to 2011), Utah (40% decrease), Oregon (40% decrease), Arizona (33% decrease), California (25% decrease), and Michigan (23% decrease). The dramatic drops in these states encouraged some real estate analysts to call the end of the foreclosure crisis.

Yet the other 25 states did experience upticks in foreclosure activity last year. The biggest surges occurred in New Jersey (55% increase), Florida (53% increase), Connecticut (48% increase), Indiana (46% increase), Illinois (33% increase) and New York (31% increase). Not surprisingly many of these states use judicial foreclosure, meaning the foreclosure process must circulate through the court system, which takes a longer time.

The judicial process takes considerably more time than the non-judicial, hence the reason that activity has been so markedly split. Nationally, the time taken to process a foreclosure from default notice to bank repossession averaged 414 days in the fourth quarter. In nonjudicial states like Texas, Delaware and Virginia, the time frame averages less than five months; in the states with the most rigorous guidelines — like New York, New Jersey and Florida — it can take up to three years.

That’s why 20 judicial states saw increases in 2012: lenders finally began processing backlogged defaults that had been in part delayed by the robo-signing scandal of late 2010. In other words, a surge in brand new foreclosures isn’t the culprit behind increases in 25 states; the long overdue processing of delayed defaults stemming from earlier years of the housing downturn is.

That said, new home and resale markets across the state will continue to see values improve because of the lack of foreclosures and short sales. Barring a catastrophic event, foreclosures should continue to dwindle in our state. Will they go away completely? No, they never have. Even in good markets consumers will run into financial hardships causing foreclosures .

Traditionally in the Texas metros, new home sales have been 25% of home sales annually. This percentage will drop due to the lack of development the last 5+ years in all Texas metros. New home builders will stretch to capture 18% of the market in 2013. It may drop to 15% in 2014. DFW, Houston and San Antonio should catch up to demand by the end of 2014 due to their entitlement process. Austin will continue to be challenged for 3 to 5 years due to the longer entitlement process ( 2.5+ years), so new homes will be challenged to capture their market share for 3 to 5 years. The other challenge is the cost of development. Not only is land more expensive, but materials, labor and utilities will easily have a 30+% increase over the next 3+ years.

With the continued job growth in the state, and the lack of foreclosures, you better get your customers ready for higher home prices.