Why housing is important to the economy

Last year, the reporting of U.S. housing data was increasingly positive. But the momentum in the housing market seems to have slowed this year. After suffering through the housing bubble and recession afterword, any mention of trouble sends tremors through the economy. Why?

Federal Reserve Chair Janet Yellen said during her semi-annual monetary policy report earlier this month that the U.S. housing market was witnessing a lackluster recovery. “The housing sector, however, has shown little recent progress. While this sector has recovered notably from its earlier trough, housing activity leveled off in the wake of last year’s increase in mortgage rates, and readings this year have, overall, continued to be disappointing.”

Except in a few stronger markets, housing is nowhere close to pulling its economic weight. Presently investment in residential property is a smaller share of the overall economy than at any time since World War II, contributing less to growth than it did even in previous steep downturns in the early 1980s, when mortgage rates hit 20 percent, or the early 1990s, when hundreds of mortgage lenders (a whole industry called savings and loans) failed.

Should building activity return to its postwar average part of the economy, GDP growth would jump this year to a booming, 1990s-like level of 4 percent, from today’s mediocre 2-plus percent. The additional building, renovating, and selling of homes would add about 1.5+/- million jobs and knock about a percentage point off the national headline unemployment rate, now 6.1 percent. That activity would close nearly 40 percent of the gap between America’s current weak economic state and what many would consider full economic health.

Here’s a quick recap of all the recent negative housing data.

• Housing starts unexpectedly plunged 9.3% to an annualized rate of 893,000, while building permits tumbled 4.2% to 963,000, though the weakness was largely concentrated in the South.

• Pending home sales fell 1.1% in June, missing expectations for a 0.5% increase.
• New home sales fell 8.1% in June to an annualized rate of 406,000, and sales fell in every region.
• Values have slowed according to most housing indexes.
• Mortgage applications fell 2.2% for the week ending July 25. Refinancing activity was down 4%, while purchase applications were up 0.2%, 12% below year-ago levels.

In a healthy market, housing makes up roughly 20% of GDP. Housing contributes to GDP in two basic ways: through home buying (residential investment – includes all construction new single and multifamily structures, residential remodeling, broker fees, etc.) and consumption spending on housing services. Historically residential investment has averaged around 5% of national GDP, leaving housing services to contribute 12-15% percent, for a combined contribution of around 20% of the GDP.

Real estate has always played an important role in the U.S. economy and continues to be an important bellwether of the national economy. Residential real estate provides housing for millions of families and is often the greatest source of wealth and savings for many families.

Last year, real estate construction contributed $925 billion, or an anemic 5.8%, to the nation’s economic output as measured by Gross Domestic Product (GDP). This is down dramatically from its peak of $1.195 trillion in 2006. At that time, it was a strong 8.9% portion of GDP. The economic effects of real estate are huge. Look at the procurement and manufacturing process of the industry. Real estate construction is labor intensive. Therefore, this decline in housing construction was a big contribution to the recession’s high unemployment rate. That said, 2013 was the best year since the great recession caused by the ‘housing bubble’.

To see what effect housing has on the economy we have to look no farther than the decline in home prices during the 2008 financial crisis. In July of 2007, the median price of an existing single-family home nationally was down 4% since its peak in October 2005, according to the National Association of Realtors. However, analysts and economists couldn’t agree on how bad that was. The decline in values had a dampening effect on real estate sales. The decline on real estate sales eventually lead to a further decline in real estate prices. This then reduces the value of everyone’s homes, whether they were actively selling it or not. This then reduces the amount of home equity loans the homeowner can get. This, then, reduces consumer spending, and changes the consumer’s economic psychology. As stated before in this column, nearly 70% of the U.S. economy is based on personal consumption. A reduction in consumer spending will contribute to a downward spiral in the economy. This results in further unemployment, further reduction in income, and further reduction in consumer spending. That is when we see the Federal Reserve intervening by reducing interest rates, otherwise there is the great possibility of the country falling into a recession. The only good news about lower home prices is that it lessens the chances of inflation.

As of 2Q14, there was a sharp bounce back in our national GDP in the second quarter, with a 4 percent growth rate. This assures that a recession is not in the cards and that job gains will continue. The latest growth was led by solid gains in residential construction (7.5 percent gain) and a respectable growth in business spending (5.5 percent gain). Consumer spending growth was humming along at 2.5 percent. The fact that GDP grew solidly on the heels of a measurable decline in the first quarter is reassuring that people’s income and job gains will continue. That in turn will help build an additional pool of homebuyers and increase leasing activity in commercial and residential real estate.
Housing has the ability to make household owners feel as though they have more money in their pockets. We call this ‘the wealth effect’. The common thought is that a house is an investment that should appreciate. As any investment, the investors will constantly re-assess the value of their investment overtime. The psychological effect of housing is real – just look at how deep the 2008 recession was, which was fueled by a housing selloff. According to the National Association of Home Builders, it only takes a 6% drop in home values to wipe out $1 trillion in household wealth. In this last recession, the loss was over $8.5 trillion in household wealth.

Texans are more than aware of the millions of jobs created during housing expansions. Consider the devastating effect of the loss of jobs in the Texas recession of the late 80’s. If you were to look at the number of construction jobs since 2003, you would notice a very strong correlation between construction job growth and housing. Using statistics from Bloomberg, just before the crisis about 8.5 million constructions jobs were filled; however, during the recession this number dropped by 26%. Since then we have recovered 560,000 jobs, leaving us with several million jobs left should we get back to average building permits/housing starts. The importance of housing and the potential job creation is significant if you understand the breakdown of U.S. GDP. Consumer spending as of last quarter was nearly 70% of the GDP, meaning if construction jobs revisited pre-crisis levels, consumers feel that they are better off, therefore spending money, stimulating the economy.

So what is holding housing back?

The two big constraints on the housing market continue to be tight supply and tight credit. Regionally we have seen a material easing in the latter; an easing in the former would not likely be far behind given the improving labor market conditions and pent up demand for housing. What was that movie line – if you build, it they will come? Modify that to if you lend it, they will build.

Lending is only now thawing, for both homebuilders and buyers. The great economic year we all felt last year was because of low levels of inventory caused by lack of lending. But those restraining factors have eased a lot in the last few years. However, as we in Texas can attest to, meeting that supply is not something that can happen overnight.

Another thing holding back housing is simply demand. It may yet prove to be temporary, but for now at least, many consumers are doubling up with roommates, living at home with parents, continuing school and otherwise delaying one thing that would get the housing economy back to normal: buying a home. Fewer consumers have shown a need the last few years to want to fulfill the American dream of starting a household of their own. There was question that was this change or a delay in making the decision. Most feel that it was a delay. A healthy national housing market should have around 1.5 million new housing units a year to meet long-term demand. 2007 was the last year that we saw those numbers.

The good news is there is over seven years of housing formation catch up. Household formation, as economists call it, is the foundation of demand in the housing market. When a young adult moves away from home and gets his/her own apartment, a household is formed; when a retiree moves out of his own place and into the apartment above an adult child’s garage, one ceases to exist. The number of American households is in constant motion; it is determined by millions of individual decisions that Americans make about their living situations, which has been delayed the last number of years. Since 2007, economic factors have prevented the formation of new households. The number of households rose by an average of 569,000 a year from 2007 to 2013, according to census data, down from 1.35 million a year from 2001 to 2006.

What should we watch to see if housing is going to improve?

Mortgage applications and delinquencies

Applications started the year strong and have been slower the last couple of months. Any slowdown, whether it be mortgage applications or sales causes some concern. This survey is taking weekly, and the good news is that it is not a long term trend presently.

In foreclosures and delinquencies, the trend is lower, and the three-year moving average is also headed lower. Here in Texas foreclosures even during the height of the recession were less than 1.5% of all sales. This number continues to improve nationally and regionally.

Household debt to equity

The measure really helps to analyze whether delinquencies will rise or fall. Household debt to equity typically has peaking periods, putting pressure on mortgage payments. We saw a sharp reversal in 2009, and the trend remains lower.


Foreclosures continue to fall from the 2008 peak and are expected to remain lower. As stated before it has been less that 1.5% of the Texas regional market, not much of a factor regionally.

Prospective Buyer Survey

The prospective buyer survey is a strong leading indicator and should be used as a consumer confidence indicator. Even though we saw a three-year peak a year ago, the overall three-year trend is higher. This is an indicator we are paying close attention to, given what looks to be a slowdown in the upward slope.

Consumer Confidence

As consumers gain confidence in the economy they spend money. One of the economic indicators analysts watch is the consumer confidence index. When it is at 100, it means a healthy economy and consumers are spending. Nationally, it has stayed in the 80’s and the national economy reflects that. Regionally it has been a healthy 108, a very healthy economic environment.

Housing is important to the U.S. economy, and therefore important to national and global economy and financial markets. Housing has an effect on our national GDP on a standalone basis, and also from a consumer health standpoint. Housing today is slower, but nationally and regionally we are improving, with all indicators showing healthier signs.

The United States economy has been stuck in a vicious cycle, one of the longest in economic recovery recorded for this country ever. A weak housing market saps the economy of strength, and the ensuing weakness — high unemployment, slow wage growth — means that fewer people are looking to buy. The good news is that we are moving out of that cycle.

The good news for most of our readers is that they live and do business in Texas. Texas and its metros felt the effect of the national economic slump, but we have led and continue to lead the country with our growth. Other than a catastrophic event I don’t see any economic concerns on the horizon. May the blessing we receive continue!

Real housing demand or speculation?

Home prices have increased more than 10% year over year nationwide. In many markets, including ours, buyers are engaging in bidding wars and submitting offers greater than list value.

Headlines and talking heads are beginning to describe this positive development as a housing bubble. Just mentioning the words “housing bubble” in a headline generates buzz and viewers. In reality, this is no bubble, but rather genuine demand for shelter paired with a low inventory of desirable homes.

Many may not understand the difference. All this buzz begs the question of what is the difference between housing demand and speculation? Let’s review some basic parameters for projecting housing growth. For starters, job growth is paramount. For every two jobs, you can count on needing one additional housing start. Apartment developers like to say for every 2.5 to 3 jobs, one new apartment. If you don’t have job growth, there is no need for additional housing.

Let’s look at the four basic laws of supply and demand: demand and the price of a commodity (real estate) have an inverse relationship.

1. If demand increases and supply remains unchanged, a shortage occurs, leading to a higher equilibrium price.
2. If demand decreases and supply remains unchanged, a surplus occurs, leading to a lower equilibrium price.
3. If demand remains unchanged and supply increases, a surplus occurs, leading to a lower equilibrium price.
4. If demand remains unchanged and supply decreases, a shortage occurs, leading to a higher equilibrium price

Speculation is known as the practice of engaging in risky financial transactions in an attempt to profit from short or medium term fluctuations in the market value of a tradable good such as real estate. In real estate the common term is ‘flipping’. I liken speculation to gambling, both are risky and usually involve participants that don’t fully understand the business and the risks.

A good example of a speculative market was Las Vegas in the boom years. In 2005, Vegas had 58,000 jobs created and 39,000 home starts, a ratio of 1.5 homes to 1 job. Now that extra 10,000 starts might not seem much, but when you compare it against actual demand the market gets out of whack quickly. Most of the homes starts were speculative, with little thought of who or when somebody was going to move in. Builders were building just to sell as quickly as possible.

Once you start building for a speculative market, it is hard to stop quickly. It takes a while to understand where the demand is. In the aforementioned example they were building speculatively for a speculative demand. As non-construction employment did not keep up with supply, the market was soon overbuilt, which in turn caused values to decrease.

It is also important to know the lag times in completing new product. In Austin it is 2.5 to 3 years from inception to actual completion of development and housing.

Using Austin as an example, we have 60,000+ people immigrating to Austin on an annual basis.

Not all units available are desirable (cost vs. value, geography, schools, etc). Because of this, and because there has been a limited number of units delivered to the ‘home’ market, the market is playing catch up from the last five years. Presently that places demand stronger than supply, creating a seller’s market.

• 142,669 total rental units Austin SMSA
• 95% occupancy = 7,133 units available

• 10,260 units under construction to be completed 2013

Total of 17,393 rental units available in the next 12 months

• 7,800 to 9,000 home starts this year
• 5,200 listings presently
Total shelter 31,593 units available

When you have demand that is greater than supply it forces prices to price. In Silicon Valley, demand is being driven by a flood of new (Facebook, Google) tech money. This has resulted in employees that have a tremendous amount of new money, but all are chasing after a shrinking supply of homes. Transactions are still below boom levels over the last 25 years and half the level seen at the peak in the mid-2000s. Prices would have to skyrocket, as we’ll see below, to get back to peak levels, so presently although some areas are experiencing record values from the depressed values of the last five years they do have a way to go.’

During the housing bust, the anchor slowing the economy was lack of construction, which in turn was a drag on the economy due to large mortgages and lower home values. Where are values now?

First, prices as measured by Case-Shiller, are still down 27 percent from their peak seven years ago. Case-Shiller calculates nominal prices, not real values. And the (inflation) is up 15 percent since 2006. So real house prices are about 37 percent below 2006 levels and are just now returning to where they were 13 years ago. Bill McBride of Calculated Risk has a great chart showing real house prices going back a few decades:

first chart

And here’s a tip for the math-challenged out there: It takes a larger percentage increase to offset a percentage decline. Take a $100,000 house at the peak. If it fell the real national average 42% percent in the bust, it would have been worth $58,000 at the bottom early last year. But to get back to $100,000, it would take a 72.4% percent increase from the trough. Even now, after the sharp bump off the bottom, prices would have to jump 60 percent to get back to their bubble-era peak.

It’s not just the national market, either. The bubble stories have focused on markets like Los Angeles, San Francisco, and even Austin. But these markets, for instance, are just now getting back to early 2000 to 2003 prices and have a ways to get to boom pricing in 2005. To get back to 2005/06 levels, San Francisco’s home prices would have to jump 60+%, by my calculations (using Case-Shiller data). LA would have to jump 65+%, Phoenix 100%, and Miami 105%. Las Vegas home prices would have to skyrocket 149% to reach ‘boom/bubble’ levels.

second chart

Here in the Texas region, even with our limited exposure to ‘bubble pricing’, Texas values still have not caught up to the long-term appreciation experienced by California and Arizona. People and realtors have a hard time understanding that. Remember, these markets experienced 45+% annual appreciation for a number of years. So even with a 60% drop in value since the peak, they are worth more than when they started. In that same time period Texas and the surrounding region did not experience the highs or lows of the housing bubble.

The continued diversity in price performance at the local level will be a function of job creation. Demand will follow jobs, which in turn will increase values. That is the main reason for the strength of the market in Austin, Houston and San Antonio over the D/FW area presently. The same can be said for the San José and San Francisco areas. There simply is not enough housing.

So again, what is the difference between speculation and true demand? Presently the multiple offers are caused by true demand in Austin, Houston, San Francisco, etc. There is not enough housing with respect to the jobs being created. This does present a small opportunity for house “flippers”, however present financing conditions demand larger down payments, slowing the speculative demand the nation experienced during the boom. Here in Texas, ‘flipping’ was tempered by the lack of tremendous appreciation (40+% annual in California and other ‘boom states). Texas and local homeowners experienced less than 3% annual appreciation at the height of the housing boom. They may be seeing a bit better presently. But you have to look at the whole metro market. There are still challenged submarkets. So just because Tarrytown is experiencing 15+% annual appreciation, does not mean you can expect similar appreciation in Round Rock, Georgetown, or Lago Vista. Real estate is local, and your appreciation is going to be somewhere below or above that. An experienced real estate professional will be able to help you find the ‘true value’ of your neighborhood and home.

Should you decide that you want to get into real estate speculation, just because you did well on your last home investment, does not equate to doing well with real estate speculation. Get with a professional, not only in the real estate channel you want to participate in, but in the submarkets you decide on. All real estate is local, as are real estate experts. I would suggest getting opinions from two or three of the local experts before making a decision.

Is now the time? That is a personal decision you need to make with your family and financial planners. But from this analysts view point, two years ago would have been the best time, now is a good time and the next three to five years should remain strong for real estate investment in our region. Remember I am not a broker, financial planner, or lawyer. I’m just an analyst with over 35+ years in this market, and right now I’m seeing one of the better markets of my career.

Now really is the time to buy!

Strong local economy spurs San Antonio housing market

The strength of the Texas real estate and housing market has been making headlines nationwide. Forbes recently identified the Austin MSA and the Houston MSA as the #1 and #2 fastest growing areas in the nation. Dallas and San Antonio rounded out the list at #4 and #9, respectively. We wanted to give you some idea of what the new year will bring, with a focus on Austin’s neighbor to the south, San Antonio.

Consumers and investors looking to get in on the action should take a close look at all of the major metros in Texas. While Austin and Houston have been getting more national attention as of late, San Antonio has just as much to offer, with high quality of life, a vibrant local economy, and low cost of living.

Let’s start with projections for the residential market in our major metros. These figures are driven by the strong job creation in each of the metros.

Projected home starts for 2013, by metro:

• Houston: 27,500 (a 28% increase in 2012 from 2011)

• DFW: 20,000 (a 21% increase in 2012 from 2011)

• Austin: 7,800 to 8,500 (a 30% increase in 2012 from 2011). Finding enough developed lots is the biggest challenge to meet this number)

• San Antonio: 8,000 to 8,800 (a 17% increase in 2012 from 2011)

Resale activity faces the same challenges, with little to no inventory.

• Houston: 73,994

• DFW: 75,207 sales last year

• San Antonio: 19,940 sales last year

• Austin: 27,000 sales in the SMSA (Austin is challenged with only 5,700 listings available as of the end of 2012.)

Apartment occupancy is strong in all metros with:

• Houston at 97%

• DFW at 93.1%

• Austin at 95.4%

• San Antonio at 90.5% (60%+ of the rental market is in the ‘C’ classification, which in turn explains the high turn over and higher vacancy rate.)

Again, most have seen the coverage of Austin and Houston’s success. Below we discuss San Antonio, a market that saw some impact from the recession, but has continued with a steady growth of jobs with base strong industries military, medical, and education.

When all is said and done, San Antonio’s home sales show a two-and-a-half year peak – and the total number of home purchases was 10% higher than it was in 2011, with a total of 19,940 homes sold, according to SABOR. The last time we saw this many contracts was in April 2010, and back then, buyers were rushing out to take advantage of federal tax credits. This time around, though, there isn’t any kind of incentive. Instead, people were out buying simply because they want or need to!

And, luckily, the momentum has carried into 2013 – it’s safe to say that San Antonio is seeing a housing surge! Real estate experts around the Alamo City expect the number of home sales to increase another 10% in 2013. While that’s not quite as big of a jump as we saw in 2012, it’s still a huge gain. And, considering the demand is based solely on the market itself – rather than any kind of incentive programs – it’s a testament to just how strong things are getting here.

Also on the rise in San Antonio has been the average price of a home. Locally, the average sales price for December 2012 for single-family residential homes registered at
$192,789 (a four percent increase from December 2011).

Breakdowns in prices show 64.6 percent of homes sold in the low-range ($199,000 and below), 32.04 percent in the midrange ($200,000 – $499,000), and 3.17 percent in the high range ($500,000 and up).

Because of the industry San Antonio has, affordable housing is one of the strengths of the San Antonio market. The median price for a home in San Antonio is $50,000 less than in Austin, with less traffic congestion. For comparison’s sake, this is also $181,000 less than the median home price in California – a fact that is often met with disbelief from Californians.

One challenge as 2013 moves along is that buyers around San Antonio will have less existing homes to choose from. This is good news for homebuilders who saw a 17% increase in starts from 2011, up to 8,077. This strength is projected to continue. This continued improvement in the San Antonio’s housing market has caused builders to take notice. As a result, local experts expect to see the number of newly-built homes increase by as much as 15% by the time this year is over. These won’t just be your run of the mill production homes, too. Home construction has been on the rise in San Antonio for the past several months, and throughout that time, one thing has been clear – people here want luxury homes. In fact, the number of home sales between $200,000 and $500,000 jumped 30% last year, so builders are taking full advantage of that trend. As a result, the number of San Antonio’s custom-built homes is expected to go up significantly this year – simply because the market demands it.

What is causing this surge in interest in the Alamo city? Part of it is simply due to location. Texas has had a strong overall economy. However, San Antonio gets the benefit of sitting right along the I-35 corridor – with Austin less than 100 miles to the north. It’s also only about three hours from Houston – a city that continues to mystify everyone with it job creation of over 90,00 jobs annually. In addition, San Antonio is a gateway to our neighbors to the south. Trade and migration with from Latin America has greatly benefited the city.

The largest employment sectors in San Antonio are education, medicine/biosciences, and government. Education, military, and local government spending employed a third of the city’s workers in 2012.

The large concentration of government workers is due mainly to the location of three military bases in the area—three Air Force bases (Brooks, Lackland, and Randolph) and one Army post (Fort Sam Houston). From the days its first mission and accompanying presidio military post were founded in 1718, San Antonio has been regarded as an area of strategic importance. By the end of World War II, the city had become the location for the nerve center of the nation’s defense network, and it remains the headquarters for the largest military establishment in the United States. The bases provide employment to approximately 74,500 military and civilian personnel and have an economic impact on the local community of $27 billion.

Education is represented by 31 colleges and universities (mostly public) that enrolled another 100,000 students, boosting the cities population by 8 percent in school time. Hundreds of thousands more jobs are in services that would not have existed without government-supported hospitals and military spending.

In 2012, the impact of the medical and biosciences industry on San Antonio’s economy surpassed $29 billion. Based on a conservative estimate, health care and bioscience industry stakeholders paid out $7.5 billion in wages and salaries to more than 156,000 employees in 2011, and more than one out of every six San Antonio workers was employed by the industry. San Antonio has gained more than 40,000 new health care and bioscience jobs over the last decade.

In addition, San Antonio itself has been the recipient over the last few years of a strong oil and gas industry – improving economic stability and allowing San Antonio to worry less about what the rest of the economy is doing.

Putting more pressure on home sales is San Antonio’s rising rental prices. The San Antonio apartment market occupancy figure is up 1% to 92+%, rental rates have increased 5+% to $.94 per sqft., and absorption has been the best since the boom years in 2005. Rents have more than kept up with the cost of living index while occupancy continues to hover just over 90% over the last seven years. As in other Texas metro markets, this has caused consumers to compare buy vs. rent more aggressively.

Some national markets are still troubled by foreclosures, but not San Antonio. The local foreclosure rate for San Antonio stands at 3.1% making it No. 312 out of 366 metro areas according to Realty Trac. A tremendous improvement over rates four years ago, when 6.8% of homes in the SA area were under foreclosure.

Other reasons companies and consumers are relocating to SA are the low tax burden, central time zone, and bilingual workforce. For relocating companies, the cost of utilities, water, and power range around 20% less than the national average. San Antonio traffic is much easier to get around in than so many metros in Texas and the US. Why? Over the last 40 years, city leaders have spent over $500 million on roadways. I am always blown away by the low average commute time of only 15 to 20 minutes.

The good news for San Antonio’s growth is that of the four major metropolitan cities in Texas, San Antonio has had the strongest growth in both exports and GDP since 2005. In fact, exports as a percent of GDP have more than doubled between 2005 and 2010. Although San Antonio’s overall GDP is the smallest of the four Texas metro areas, in terms of exports as a percentage of GDP, San Antonio ranks third and surpassed Dallas in 2009. This should help continue strength in the housing market.

San Antonio has two strong sub markets. South San Antonio has been a benefactor of the Eagle Ford shale play. The strength of this market has helped all real estate channels from residential to industrial and should continue for a projected 15 to 20 years.

Another one of San Antonio’s strong submarkets is New Braunfels. In this small, historically German and Hispanic town, the growth has been driven by mid-management retirees from the military or energy industry. Blue / Green properties was a major influence with their aggressive land sales to this market. Couple that the closeness to medical and military bases, low cost of living for retirees, and you can see why the market has done well. Over the last year we have seen home resale inventories decrease slightly, helping values. Distressed properties such as foreclosures and short sales remained the same as a percentage of the total market in January and have had little impact on values. The median home price is $259,500, a 10% increase from a year ago.

The residential rental market in New Braunfels is like most Texas metros, strong at 95% occupancy, and rents at record highs.

However, not everything is completely rosy. There are some challenges and opportunities within the San Antonio office market channel.

The overall strength of the San Antonio’s real estate market has been the steadiness through the recession, with no big dips or rises. Most local submarkets seem to have turned the corner. However, the office sector is still challenged caused by the ATT relocation a couple of years ago to Dallas. This has put citywide office vacancy close to 18%. While metrowide growth in San Antonio has boosted job creation and generated new demand for local space this year, office vacancy continues to rise. Why? Most of this challenge is attributable to corporate relocations to recently purchased or build-to-suit properties.

One of the office submarkets hit the hardest were the northern SA submarkets, where Kinetic Concepts Inc. (KCI), NuStar Energy, and Nationwide leave behind more than 400,000 square feet of previously leased space. The CBD continues to be challenged, with food-supplier C.H. Guenther vacating approximately 55,000 square feet to move into its newly built headquarters, though the majority of recent vacancy can be tied to AT&T, which continued to shed space and consolidate its remaining San Antonio staff in the first part of this year. At one time, ATT had over 400,000 square feet in the CBD.

Where is the opportunity? This much contiguous office space available is in short demand in Texas as well as most major metros across the nation. This puts San Antonio at an advantage and has a number of relocating corporations looking here because of the availability of space. 2013 – 14 could lead to some major announcements helping the local market.

What do this mean for San Antonio area home buyers and sellers?

Barring resurrection of the recent economic recession, it’s likely San Antonio’s home sales market will remain strong through 2013. Because the area’s inventory of available homes is relatively low, 2013 will see a moderate to strong San Antonio area home seller’s market, quicker sales, and higher than average list and sales price appreciations. That’s not necessarily bad news for home buyers, because quality San Antonio homes will likely remain remarkably affordable when compared to similar products in the nation’s other large metropolitan areas.

Getting ready for the next housing boom

Yes, you read that right.

Get ready for the next housing boom. With the negative media, political dysfunction, mortgage delinquencies and foreclosures we still have going on, and the record levels of housing inventory, how could we possibly have another housing boom, right?

Despite all the problems we are seeing today, pent up demand is creating the next housing boom. Demand for housing is closely tied to the rate of household formation which, if you hadn’t noticed, has been lacking the last five to six years. Any growing economy creates more households and more households eventually need more houses and more apartments. Right now, due to the challenged economy and jobs market, household formation is been on hold. This is one reason why the housing market continues to pick up.

A household is simply a residential unit of shelter. Everyone has to have shelter. It refers to a person or persons living under one roof. Traditionally, a household has been thought of as a nuclear family. Boy meets girl, boy marries girl, and boy and girl buy a house or rent an apartment. In this way, marriage creates more households and demand for more places to live. Divorce, too, creates more households and demand for more housing. People who get divorced do not want to continue living together under the same roof. Households are also formed when children grow up and move out. Most kids can’t wait to get their own place. The US still has population growth, driving employment growth, which leads to housing growth, and results in increased housing demand.

Much of this growth has been postponed. As we all know, employment remains depressed, particularly marginal manufacturing jobs, that have been shipped overseas (except in Texas). College graduates have been moving back with parents. The process of generating new households seems to have stopped or slowed down dramatically. Whether it is the poor economy or just the new norm, more people are postponing marriage. For the first time since 1940, less than 50% of households are maintained by married couples (per 2010 Census). Others are postponing divorce. And as much as they would like to be independent, many grown children are staying put. Some can’t find jobs even after graduating from college, so they are choosing to live with mom and dad just a little longer. Even those lucky enough to be employed are moving in with their parents in order to cut expenses.

This lack of household formation is good news for housing in the long run. It means there is a lot of pent up demand for housing and, based on the last Census, it is growing. Current household formation may be slower currently, yet potential household demand is strong. As the economy continues to pick up steam and more people start to find jobs, household formation will surge. Once that happens, demand for houses and apartments will also surge.

Let’s examine the primary drivers of this demand.

• Job creation is paramount – Texas leads the nation, having created (and still creating) roughly a quarter of all jobs in the US the last few years and projections suggesting that this should continue.

• Population growth – Texas, primarily the four metros, will double in population over the next twenty years. Austin alone is projected to add 60,000 people a year (160 people a day).

• Baby Boomers/retirees – Texas has a low tax burden (46th in the nation), no state income tax, and warm weather, making Texas the #2 destination for this age group. 46% currently own a home.

• Echo boomers – the biggest opportunity here is that 51% still rent (US Census Bureau). However according to the latest FNMA surveys, close to 70% still think that buying a home is something they want to do. Part of that demand is based on businesses discovering the cost savings of moving to Texas. With no state income tax and a low tax burden, estimated savings is close to 30% compared to most other states.

Looking at all the Texas metros, where is the opportunity?

• Austin is in a unique position with limited supply of residential inventory, developed lots, homes, apartments, and 95% to 98% occupancy for rentals in the five county area. All residential is tight. Office is strong; retail is stronger than other markets. Austin was named by HomeVestors as one of the top 25 areas to buy investment property.

• Inside Houston’s outside loop core we continue to have a unique market with strong appreciation and absorption. Also the Woodlands has seen explosive growth with Exxon moving their global headquarters there.

• San Antonio residential continues to improve with limited availability of new homes and development. Multi family continues to improve. Office, retail will remain flat with industrial having a tremendous boost from the Eagle Ford shale play.

• Dallas/Fort Worth has turned the quarter at 97% of pre-recession residential absorption. Multifamily is doing better, but continues to be challenged with short sales and foreclosures.

It’s happening. Locally we have seen the housing market tighten up tremendously as people from all over the country move here for jobs and the high quality of life Austin offers. Even still, in the Austin area and Texas, there continues to be challenged areas. So recovery may not happen for a few more years nationally (possibly 25+ years in some areas. Here in Austin there are some areas that have over 70 years of inventory still.)

This is not to say that any of this is imminent. More likely than not, the process could take a few more years. The United States continues to slowly improve. However many believe that the housing market will turn around. All that pent up demand for household formation should create a strong rebound in the demand for housing. That is, if we can avoid the coming fiscal cliff, which has the potential to undo all the recovery we have made and plunge the United States into a new recession.

The fiscal cliff and housing

If the federal government does not come to a budget solution, what could it mean for the home building and mortgage industry? As Republicans and Democrats brace for a budget standoff based on ideological differences on tax hikes and their impact on small business, lawmakers may find common ground by including housing market relief into discussions on how to grow Main Street America. Depressed home values remain a key constraint for small business creation and widespread negative home equity in many hard hit regions precludes real estate assets from being used a source of capital for hiring or expansion.

But that’s not to say trends aren’t improving, as the nation’s overall home equity surplus shows an increasing rate of recovery. In third quarter results released by the Federal Reserve in late September, home equity rose to its highest post-crisis level, even eclipsing 2008 levels.

Presently, the nation now faces something equally different and just as dangerous — falling off of the fiscal cliff. The outcome of our trip to the edge of or over the fiscal cliff has wide ramifications for our economy, yet the impact on the housing market could be among the most significant.

Quite simply, the fiscal cliff is the combination of automatic spending cuts and automatic tax increases that take effect either at the end of 2012, or the very beginning of 2013. It was a gimmick, known as the Budget Control Act of 2011, which was put in place by Congress and President Obama to attempt to force a budgetary compromise. It represents a “kick-the-can-down-the-road” approach to policymaking – which seems like the dominant way our national budget has been managed for the last decade.

Unable to reach an acceptable compromise by the deadline, our elected Congressional and administrative officials on both sides chose to vote for something they did not entirely support largely because it contained policies that their opponents also found intolerable.

Among the changes to current law set to take effect at midnight on December 31, 2012 are the end of last year’s payroll tax cuts (2% for most workers), the end of certain tax breaks for businesses, modifications to the Alternative Minimum Tax that would impact far more people, the end of the Bush tax cuts, including capital gains and estate tax cuts, and the initiation of taxes related to the Affordable Care Act.

Concurrently, spending cuts that were agreed upon as part of the debt ceiling deal of 2011 would commence. Estimates are that over one thousand government programs will face steep cuts, including $500 billion from defense over the next decade.

It is vital to remember the recent rebound in the housing market is a function of two primary factors. First, historically low interest rates served to prop up the ailing market. Second, the market has benefited from the sense that it has finally bottomed out, which buoyed consumer confidence. What impact would failure to avoid the fiscal cliff have on the housing market and the economy as a whole? In a word: disaster. Let’s examine how the fiscal cliff will directly derail the two factors that have driven the rebound in housing.

First, failure to address the cliff will end the incredibly low interest rates we have been enjoying. Let’s not forget the reason such massive spending cuts and tax hikes are being contemplated during this time in history is the existence of our nation’s $16 Trillion debt. According to figures from the U.S. Treasury from August 2012, approximately 53% of our current debt is owned by foreign investors. China accounts for 10% of U.S. debt ownership, but — and this is key — China appears to be reducing its holdings of U.S. treasuries.

The reason for China’s reduction in Treasury holdings is a belief on their part that the value of U.S. denominated debt will decrease over time based on the inability of U.S. officials to put a credible debt reduction plan in place that does not compromise economic growth. China and other foreign investors would be tempted to sell more U.S. debt and reduce their future purchases if it appears a responsible plan will not be adopted. When U.S. debt loses its appeal, interest rates have to be increased to lure purchasers. If that happens, our current period of historically low interest rates will end.

The second reason for the resurgence in housing has been a sense that the worst was behind us relative to the economy, the jobs market and property values. A new recession (caused by falling from the fiscal cliff) with as many as 1 to 2 million new unemployed Americans will devastate consumer confidence and risks another wave of home foreclosures. Moreover, the recent gains in home values would likely evaporate as the pool of potential buyers falls dramatically.

In order to avoid a catastrophic outcome, our political leaders must work out a compromise on taxes and entitlements that is amenable to both sides that sets our country on a fiscally responsible path. The alternatives – kicking the can down the road, or simply plunging over the cliff – are unacceptable.

After this hard fought political season, our political leaders difficult response to the crisis at hand is needed. Out of control entitlement, defense, and social spending needs to be a thing of the past. Compromise and working together need to be the mission. Anyone that has been in a successful relationship will tell you that compromise is paramount. If Congress is too late, they risk the wrath of global investors passing on Treasuries with potentially “rocky” consequences. Credible action must take place before the end of the year. It doesn’t have to be the final deal, yet it must be detailed enough and involve pledges from all parties that the deal will be resolved within a very short period of time.

The housing market continues to swim upstream in a sea of uncertainty and won’t be on its way to recovery until some sort of concrete forward-looking directional guidance is offered by an official source, good or bad! This mess can’t be cleaned up overnight, nor do we think it’s fair to expect a broad-based reform package to be implemented with one swipe of the President’s pen. What we do expect is better management of expectations and a clear voice of leadership in Congress or the administration. If the regulators are really having this much difficulty making a decision on the next move, then maybe they shouldn’t implement patchwork regulations just to appease outcries for reform. All that does is create more confusion, which only breeds more uncertainties and adds further barriers to the home loan qualification process.

The housing market is particularly vulnerable at this moment in its recovery. The potential consequences for housing include rising interest rates, dropping home values, a resurgence of foreclosures and a dramatic, perhaps generational long loss of consumer confidence. With stakes like these, all Americans, particularly homeowners and those dependent on the housing economy, must demand action from our leaders.

If no serious attention is given to housing finance reform until after the fiscal cliff, what are the implications on the broader economy? A clear solution is what is needed. It will take time for any solution to start the healing process, but if you continue the political haggling, it is like ripping the band aid off again and again. It slows the healing process.

The Best Economic News in a Long Time

Last week’s national housing starts and permits report is the best economic news in a long time. Why? Because housing always leads the economy, and the direction of that lead lasts a year or two into the future. And at this point, the positive trend in housing construction is strongly established.

The most important measure of housing construction isn’t how much of a recovery there has been relative to the last peak, but how many additional houses are being built now compared with the last measurement period. For example, going from 0 to 200,000 new houses in a year adds just as much new employment as going from 2,000,000 to 2,200,000 new houses. The same amount of new construction workers are needed to build those 200,000 additional houses, the same amount of appliances and furniture will be bought to fill them, etc.

This isn’t just theory; it’s backed up by the data. Here are some graphs to drive the point home. First, here is a graph of the year over year change in the number of houses built (blue) vs. the year over year percentage change in GDP since 1983 (red).

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For every 200,000 additional houses built, GDP consistently increases over trend by 1%, with a variable lead time of several quarters to several years. Of course, GDP growth is an imperfect measure of workers’ economic well-being. What the next graph shows is that GDP growth (red) consistently leads job growth (black).

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Because increased housing construction consistently leads to GDP growth, and GDP growth leads to job growth, it should be no surprise that housing construction (blue) increases lead to job growth (black).

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This week’s data shows us the best housing construction growth in eight years, and equal to the best growth in over 25 years! This rate of growth in construction is associated with a subsequent 4-5% year over year GDP growth, and with 2% or 3% jobs growth within the next year or two.

In other words, the best national economic news in a long time.

While I’m at it, there is more good economic news in car and light truck sales. This shows that small business (85+% share of US GDP) have improved confidence in their future business. The average age of trucks and cars on the road is over ten years old, which is a strong indicator that consumers have been putting off new vehicle purchases.

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Another piece of positive data is that consumer credit has been growing fairly consistently since reaching a low point in 2010. The chart below shows that the average consumer has increased their spending in the last couple of months. When you look at this realize that consumer credit has been virtually non-existent since the recession. The unemployed or those facing foreclosure spend very little on retail purchases

Most in the real estate business are aware that retail nationally has been challenged over the last few years. Real retail sales are the “holy grail” leading indicator for jobs over the next six months or so. Measure consumer credit levels year over year and then divide by two, and you usually get a pretty good idea of national job growth in the near future. The trend in growth had been declining but has now rebounded.

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We have begun to see the re-accelerating of retail sales growth. Americans may have slowed their spending in September 2012 after splurging in the month before during the busy back-to-school shopping season. But more importantly, they are still spending. Still, given the economic and political uncertainty that weighs on many Americans right now before the election, analysts say the results are an encouraging sign for stores as they head into what’s traditionally the busiest shopping period of the year in November and December.

Right now consumer confidence is at a seven-month high as people are feeling better about rising home prices and a rebounding stock market. Still job growth remains weak and prices for everything from food to gas are higher. On top of that, there’s a worry that the U.S. economy will fall into another recession next year no matter who is elected. That’s when tax increases and deep government spending cuts will take effect unless Congress reaches a budget deal.

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Because of economic and political uncertainty, The National Retail Federation, the nation’s largest retail trade group, tempered its expectations for the winter holidays. The group said early this month that it expects sales for the November and December period to rise 4.1 percent.

That’s more than a percentage point lower than the growth in each of the past years and the smallest increase since 2009 when sales were up just 0.3 percent. But the retail forecast still is higher than the 3.5 percent average over the past 10 years.

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Another indicator I became aware of many years ago was how restaurants are doing. When I first got into looking at market indicators for housing, I was told by one of my mentors (Nash Phillips and Clyde Copus) to talk to the dry cleaners to see if the use of nice tablecloths and napkins was on the rise. Now, having just received a degree at the University of Texas, it didn’t seem right to use what I saw as a silly indicator ……Guess what? We still look at what local restaurants as well as national restaurant chains are doing as an indicator of national and local economic strength.

Below you can see that restaurant owners are saw a recent spike up in their outlook. (They’re a great measure of consumer discretionary spending).

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Looking locally in our Texas metros, we have seen aggressive expansion of local and national restaurant groups. In Austin, Larry Maguire has opened three new restaurants (Fresa’s Chicken Al Carbon, Clarks, Elizabeth Street Café) in the last eight months to strong acclaim. San Antonio and Houston are seeing the same level of expansion of the local national chains. These expansions are taken lightly in light of the last five years of closing many stores.

Another indicator that always has been a bellwether to better home sales is home improvement stores performance. With the surge in construction, you can see below Home Depot continues to improve People tend to either fix up their old house to live there longer or sale to move up. Home Depot performance shows continued strength for an extended period.

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The unemployment rate is improving. Both the headline rate (U3 BLS) and the “true unemployment rate” (U6 BLS) of unemployed and underemployed are declining. With the continued confidence, businesses should continue hiring and employment rates should continue to improve. Is the worst behind us? There will always be some concern after such a long recession and loss of personal wealth in real estate and investments. But again most indicators seem to have turned upward away from the bottom.

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The takeaway from this analysis is that both the long leading indicator of housing and the short leading indicator of consumer spending are pointing to an improving jobs picture in the near future.
Take these indicators with a healthy dose of caution. Most of the nation’s metros and states are five to ten years from full recovery, and some areas are 20+ years (think of Texas in the 90’s). Further, the financial constraints of Dodd-Franks and Basel III will put a damper on this growth nationally.
Then again, if you’re reading this you probably live in Texas, where one out of four jobs since the recession is created. What Texas has to worry about is where we are going to put all the people moving here – a good problem to have.

So what does this mean for us in Texas? Hopefully continued employment growth. According to data from Texas A&M Real Estate Center, Texas real estate has increase 240% over the last 5 years for a total value of $1.6 Trillion. All channels, residential, commercial, industrial, and ranch have increased in value and should continue to appreciate.

If you are thinking you should wait to buy or till rates get better, I think based on the data you better hurry…we have long passed bottom in this state.