Looking forward to 2014

Last week, we identified 2013 as the year we “felt” the economy improve. What can we expect in the coming year?

On a national scale, the economy continues to recover slowly. The Bureau of Labor Statistics forecasts a slow but steady national recovery. Most consumers continue to remain cautious, so small and big businesses are likewise cautious with hiring and capital investment, which in turn keeps both employment and income at a less-than-desirable growth rate.

The economic picture is different In Texas, particularly in our four larger metros. The Texas economy continues to outperform the rest of the country. Unlike the rest of the nation, we have recovered to prerecession numbers on GDP, employment, and many other economic metrics. In real estate, new and pre-owned values continue to rise, and the number of houses for sale is at the lowest point in a decade, making most of these markets ‘seller’s markets’ with more demand than supply. Commercial, office, and industrial, which made up the bulk of the equity value losses suffered during the recession, have recovered. All these channels should continue strong through 2014-2015 based on projected job growth.

Employment

For the past 22 years, Texas job growth has outpaced national job growth 2-to-1. The detractors point to the fact that Texas has created a lot of low-paying jobs (in fact, more than any other state). While the United States has seen job reduction particularly in the lower-income channels, Texas has created jobs in those channels as well as the vital middle-income workers, too. The bottom line—we have experienced growth across all sectors and in all income categories. We added 267,400 jobs since the start of 2013, a 2.4 percent increase. In the first decade of the 21st century, Texas created nearly a third of the nation’s highest-paying jobs, and there has been a nice increase in middle-income jobs as well. The Texas unemployment rate has been at or below the national rate for 82 consecutive months.

It came as no surprise when a study by the highly respected Brookings Institute, as reported in the Wall Street Journal, revealed that only 14 of the nation’s 100 biggest metropolitan areas have more people employed than they did before the 2007–09 recession, and that six of them are in Texas: Austin, San Antonio, McAllen, Dallas, Houston, and El Paso. “Robust employment in the oil and gas industries helped the Texas cities,” the article read, “although data from the Texas Workforce Commission suggests the job recovery has come from a variety of industries.” In the late 80’s it was the energy field and the collapse of the savings and loans that hobbled the Texas economy. The good news is that not only has the Texas economy grown stronger, but broader based as well.

Earlier this year, a Milken Institute study on high-tech centers across the U.S. concludes that Texas has three of the top 25 high-tech centers in the country—Dallas, Houston, and Austin. That said, San Antonio has had a 27% increase in high tech workers the last four years due to Rackspace and Geekdom. Although San Antonio didn’t make the list it is making rapid steps to be included and watched in the future.

Tougher mortgage and bank lending rules

The rules and regulations put in place by the 2010 Dodd Franks financial regulatory bill, capital requirements of Basel III, and the continued hyper regulation of the Consumer Financial Protection Bureau will all make lending harder. The upshot of this regulation is that banks are likely to narrow their loan offerings and rely more on thirty year fixed rate mortgages, a product unique to the US and one that has required a government guarantee. Currently, over 95% of all loans are backed or controlled by government backed agencies, which is something the Federal government would like to get away from. With less banks to lend, offerings will be limited, which nationally as well as regionally will place small business lending in a harsher environment. Before you point out that record profits are made by the big corporations, realize that 85+% of our GDP is small business. The regulatory constraints put on them the last few years make their need for capital paramount, just when this harsher regulations are coming into action.

The CFRB released new mortgage rules for qualified mortgages. The new rules come at a time when regulators and banks are trying to find a middle ground between overly lax and overly tight lending standards. For years, the lending pendulum has never been just quite in the middle, either too lax or too harsh. 2014 looks like it will continue to swing to the harsher side. The new guidelines and harsher parameters for both buyers and lenders will in all likelihood make it harder to qualify for a loan and from a lender standpoint, harder to lend. Because of this, mortgage lending will be a more difficult environment through 2014 – the bottom line is that it will be harder to qualify than it has in many years, slowing down home sales.

Real estate will continue to increase in value

Buying a home will be more expensive in 2014 than in 2013. Although home price increases should slow some from this year’s fast pace, prices will continue to rise faster than both incomes and rents. Also, mortgage rates will be higher in 2014 than in 2013, thanks both to the strengthening economy (rates tend to rise in recoveries) and to the Federal Reserve tapering its bond-buying program, whenever it comes. The rising cost of homeownership will make homes less affordable for some.

As evidenced by the impressive job creation numbers above, the Texas regional economy should continue to outshine the rest of the nation. Driven by continued employment and population growth, analysts estimate that the region’s employment rate will experience a 3% growth rate annually over the next two years. This growth will bring the Texas metros to double their current populations within the next 20 years.

Because of this job growth, the rental market will remain tight. All four Texas metros have seen a continued ‘ seller’s market’ with greater demand than inventory. Rental and sales values should continue an upward swing, with an expected easing somewhat at the end of 2014 as more finished development comes on line.

Low inventory will keep values high. After five years of not building, developing, or lending for anything, you can’t just create the inventory needed overnight. With the residential housing markets stabilized, as well as office, industrial and retail we have begun to see limited inventory being addressed with new construction this year and well into 2015. As discussed here some areas may be at a tipping point, but the vast majority of real estate channels will continue to pay catch up. As we have stated before, there just isn’t enough housing, office, industrial, etc. to address the influx of businesses moving here.

The lack of developed lots and land continue to define the Austin market. Remember it traditionally takes about two and a half years to buy a piece of land, get it entitled, and start construction of homes. So, anything bought today will take at least that long to come to market.

Apartment development may start to slow. With the tremendous demand for apartments during the recession, boosted by increased demand from homeowners-turned-renters, multi-family building surged across the nation but particularly in Houston, Austin, and DFW. This channel of real estate may be at a tipping point, where development may slow to gauge demand and potential of oversupply. But that’s likely to quiet down in 2015, as supply and demand may have swapped places – and there may actually have been too much multi-family building in 2013-14.

Also limiting inventory is the construction labor shortage. The slowdown and recession caused by the housing bubble forced many construction workers to move on to other jobs and put many production builder companies and subcontractors out of business. Some of the delays are being caused by shortages in the concrete and framing trades, causing problems in even the first construction phases. The median labor wage hike nationally as well as locally is around 4%, with a maximum of 15%.

This shortage is not only increasing the price of labor and putting pressure on margins, but also it is increasing the time it takes to build a house. A survey of builders locally shows that the average time it takes to start and finish a home in Austin, from start to finish, has climbed from four months to over seven months. But not all of the start delays are being caused by worker shortages. It’s also taking builders longer to get permits because local municipal governments have cut staff. It has already begun to impact the time it takes to start and finish homes.

This is life on the other side of the housing crash. Home starts are climbing, prices are up, and builders can’t find enough workers. Austin and Texas have been adding construction jobs since mid-2012, and some builders still can’t finish homes on time because framers, plumbers, and even cleanup crews are in high demand. Many skilled workers from before the recession have moved to better paying oil and gas jobs or moved back to Mexico. Potential new workers failed to get into the pipeline, because construction woes dragged on for so long.

Also compounding construction is that newcomers aren’t arriving from Mexico, at least not like in the past. They used to be a crucial labor source for fast-growing businesses. Builders and subcontractors don’t want to be quoted on immigration, because it’s such a political issue, but they believe it’s a big factor in the labor shortage.

In April of 2012, the Pew Research Center estimated that net migration between the United States and Mexico had flattened and perhaps reversed from 2005 to 2010. In five years, slightly more people moved to Mexico. A decade earlier, in a similar five-year period, almost 2.3 million more moved from Mexico to the U.S. Pew attributed the recent standstill to many factors, including the weak construction job market, tougher border enforcement, and a rise in deportations. As the economy picks up, Mexican immigration could resume.

Builders are hoping and counting on it. They’re OK with the labor shortage, partly because it’s better to manage a growing business. But they also hope it’s a temporary condition. As word spreads, they expect labor markets to respond, whether from the unemployed, other states, or Mexico.

Six years ago, housing starts peaked in Central Texas and then slowed. Only recently has the recovery looked solid and sustainable, so it actually feels good to have a labor shortage. Texas is ahead of the curve. While hiring here is up in 2013, construction employment nationwide had been wallowing around the bottom for more than two plus years, until 2013. As the market improves nationally, it will but pressure on raising labor prices which have been stagnant the last 6+ years, again adding to the cost of homes and construction.

There are potential hurdles this year. 2014 in Austin will stay strong on most real estate channel, and the rest of the nation will continue to improve slowly, putting added pressure on our regional needs for labor and materials across all channels. Even with the hurdles mentioned, 2014’s forecast for our metros and the rest of the state will be head and shoulders above the remainder of the nation and most of the world.

Is the housing market improving? Or not?

Is the housing market improving? Or not? In this edition of the Independence Voice, we will explore some of the arguments on both sides, and allow you to reach your own conclusion.

The housing market is improving

• According to the National Association of Home Builders, over 76% (274) of the 361 markets they follow have shown improvement over the last 6 months. There is no doubt the housing economy is on more solid footing than a year ago in these markets.

• Most national housing indexes are showing improvement in resales and mortgages. According to Corelogic, house prices are up 10.2% the last 12 months, the biggest increase in seven years. Case Shiller showed a 7% increase over the last year. Case-Shiller is currently the most followed house price index, however CoreLogic is used by the Federal Reserve and is followed by many analysts. The CoreLogic HPI is a three month weighted average and is not seasonally adjusted.

• The Federal Reserve continues to keep lending rates at historically low rates, encouraging home ownership and investment. There has never been a more affordable time to buy. Housing affordability remains rather high even as prices continue to rise across the country thanks in large part to mortgage rates being artificially depressed by the Federal Reserve Board’s latest round of bond-buying, known as QE3.

• The number of underwater mortgages declined dramatically due to improving markets. Of the 52,394,000 home mortgages outstanding, the number underwater fell from 11 million to 7 million, more than a 30% reduction in underwater loans. Most analysts predict that almost 1 million more homeowners will be freed from underwater mortgages by the end of 2013, pushing the negative equity rate for the country down to 25.5 percent.

• The national inventory of resale homes continues to be under equilibrium (equilibrium defined as six months of supply) indicating a ‘sellers market’ with a 4.7-month supply at the current sales pace, up from 4.3 months in January, which was the lowest supply since May 2005. Listed inventory is 19.2 percent below a year ago when there was a 6.4-month supply. At that rate, the home building industry remains at less than two-thirds of what would be considered a normal market.

• The national median existing-home price for all housing types continues to improve. It was $173,600 in February 2013, up 11.6 percent from February 2012. The last time there were 12 consecutive months of year-over-year price increases was from June 2005 to May 2006. The February gain is the strongest since November 2005, when it was 12.9 percent above a year earlier.

• Troubled mortgage giant FNMA had its best year ever. The ability to turn the corner two years after being delisted on the New York Stock Exchange is big. Fannie Mae today reported annual net income of $17.2 billion for 2012 and quarterly net income of $7.6 billion for the fourth quarter of 2012, compared with a net loss of $16.9 billion for 2011. The improvement in the company’s full-year and quarterly net income was due primarily to improved credit results driven by a decline in serious delinquency rates, an increase in home prices, higher sales prices on Fannie Mae-owned properties, and the company’s resolution agreements with Bank of America. As a result of actions taken to strengthen its financial performance, and continued improvement in the housing market, Fannie Mae’s financial results improved significantly in 2012 and the company expects to remain profitable for the foreseeable future.

• Nationally, regionally, and locally there is not enough housing and real estate inventory. Twelve months ago, all three afore mentioned markets were challenged. Now, whether you are a consumer or a builder, the lack of available inventory has dramatically diminished with little to no inventory in the pipeline. This in turn puts positive pressure on values and sellers.

• Last but not least is the improving unemployment picture. While the number of Americans filing new claims for jobless benefits edged higher last week to 336,000, a trend reading dropped to its lowest level in five years. That bodes well for job creation in March because the data covered the survey period for the government’s monthly tally of nonfarm jobs. The four-week average of new claims fell last week to 339,750, down 6 percent relative to the survey week in February, when nonfarm payrolls increased by 236,000.
The housing market is not improving

• While the number of ’underwater’ homeowners has improved, it is still extremely high on a historical basis. An estimated 28% nationally are still ‘underwater’ (the figure is calculated based on anticipated changes in home values). When people can’t sell their home, they can’t purchase, or help contribute to the economy.

• Home values are still 30% or more off their peak in many markets. That means there is a long way to recovery, and we are not there yet.

• Only seven states are at prerecession employment numbers. Most metros and states have a way to go before they are in a recovery mode.

• Have you tried getting a loan? Loans may be cheap, but only for those who have sterling credit and don’t really need it. With unemployment so high and wages not improving, millions of people can’t qualify or sell.

• While we are speaking about loans, there does not seem to be an answer to what should be done about the government guaranteeing loans through FNMA/ FMAC and FHA. When is that bill going to come due, and how much will it eventually cost the taxpayers? And what will the government end up doing with all that debt?

• The Federal government has passed a debt ceiling scared, but without much damage, but the sequester will cause massive budget cuts that effect schools, government jobs, and private industry. When Congress imposes this large of spending cuts it should depress economic growth and drive unemployment back up and cause more foreclosures and less people buying. Its hard to think about home buying when there is so much uncertainty in the economy. Budget sequester spending cuts starting March 1 between -.5 to -1.0 of annual GDP ($48,112,000,000,000). That’s potentially a lot of jobs.

• In Texas, budget sequestration will cost the state $16.039 billion in gross state product. That is 1.23 % of the states total GDP for 2012. 159,473 jobs will be lost in Texas. 98,979 of the jobs will be because of defense spending. 60,494 if the jobs will be because of cuts in non defense spending. Texas stands to lose $67.8 million in education funding, putting about 930 teacher and aide jobs at risk. Head Start services would be slashed for 4,800 children. About 52,000 Department of Defense employees will be furloughed.

• While United States employment is up, wages are declining, according to the Bureau of Labor Statistics. Employment increased nationally by 1.6 percent, or 2 million jobs, for the year September 2011 to September 2012. But, average weekly wages for the country as a whole declined by 1.1 percent (taking the figure down to $906 per week in Q3 2012). This is one of only six annual average weekly wage declines since 1978, the report notes. Wages declined across all industries save for the information sector, which saw a modest increase of 1.3 percent. The county-by-county breakdown follows the same trend. Employment increased in 84 percent of the largest U.S. counties over the same timeframe. Yet among these largest counties, nearly the same percent saw over-the-year declines in average weekly wages. Only 46 counties saw over-the-year increases.

• Existing home inventory is on the rise nationally. The increased number of homes for sale may suggest that there still is a large amount of shadow inventory that lenders are dumping, causing values to decrease more. The total housing inventory at the end of February increased 9.6% from the previous month to 1.94 million existing homes for sale. Part of this rise was seasonal, but rising prices are also inducing more home owners to place their homes on the market. While inventory is rising, demand is rising faster. At the current sales rate, the February 2013 inventory represents a 4.7-month supply compared to a 6.4-month supply of homes a year ago. Concerns remain about the mix of home buyers. NAR estimates that in February, all-cash transactions rose to 32% of all existing home sales. Investor buyers constituted 22% of sales. The number of first-time buyers remain historically low, at 30% of buyers in February, down from 32% from a year ago.

• Other notes of caution come from the builder side of the supply equation. Due to the historic nature of the downturn in residential construction, it is not surprising that the infrastructure of building – buildable lots, workers with the right skills and a pipeline of building materials – will at times and in certain locations be insufficient to meet the demands of rising home construction.

So, is the market improving or not? And what does this mean for us in Texas?

The national housing and real estate market, in this analysts eyes, continues to improve slowly, much slower than past recoveries.

Real estate appreciation has been good, but not great in our state over the last five years. On a national scale, Texas has been 45th or less in appreciation (we moved up from 50th). So even though the rest of the nation suffered, Texas and its metros have had nice steady organic growth. Many readers will groan and possibly disagree with that statement, however if you look at the last ten years in Austin, San Antonio, Houston, or D/FW, our housing appreciation did not beat Case Shiller or any of the national indexes. Again in this analysts eyes this is a good thing, we have not got caught in the ‘speculation bubble’ that has happened in most growth states. More stringent lending and mortgage parameters look to slow speculation in our metros.

That said, with home and lot inventory remaining historically low regionally, Texas metro markets will remain challenged to keep pace with demand. Prices of newly built homes are expected to increase in the coming year for multiple reasons. One is low supply, but rising building costs for lots, materials, and labor will also boost new home sales prices. Speaking of labor, the welcome shale oil play has had a large impact on construction costs. Not as many suppliers or labor are available for new work. As a result, the NAHB reports adverse effects for most builders nationally and particularly locally. Between June 2012 and March 2013, the share of builders reporting at least some shortage increased in every category of labor. Averaged across all twelve categories, 27.8% reported a shortage of directly employed workers in 2013, up from 19.6% in 2012. The majority of builders reported that labor shortages over the past six months have caused them to pay higher wages or subcontractor bids, and to raise home prices. Other effects include delays in completing projects on time, being forced to turn down some projects and lost or cancelled sales.

Additionally, building materials prices continue to rise. While overall producer prices have been relatively stable, the prices for certain building materials have risen rapidly as the housing recovery has gained momentum since the beginning of 2012 through the 1st quarter of 2013. Overall producer prices are up less than 3% while softwood lumber, OSB, and gypsum prices are 30%, 80% and 26% higher than at the start of 2012. According to data associated with the Consumer Price Index, gasoline prices were up 3.3% in February year over year.

All that said, the long-term prospects of home building nationally demand remain positive, with builders ramping up production despite the occasional monthly dips. Housing starts for February came in at a healthy pace for both single- and multifamily units according to Census data. As most of us know, locally, new construction is improved dramatically and looks to be on at least a three year rally because of demand. Nationally, single-family housing starts in February ran at a 618,000 annual pace while multifamily starts came in at 299,000. This represents a continuation of the solid growth trajectory in single-family starts that began in earnest in late 2011 and carried through the start of 2013. Issuance of new building permits is on track to sustain the current levels of production and NAHB expects that going forward, the pace of single-family production will accelerate, approaching 1 million starts by the end of 2014. A doubling of starts from 2011, but still 40+% less than the top of the market.

So yes, the housing and real estate market is improving!

Most housing consumers are finding that the house / rental they look at this morning won’t be available this afternoon.

I know that you are tired of hearing this from me: if not now, when?

2013 Texas Metros Housing Forecast

This week we had the good fortune to attend the 2013 housing forecast by the Austin Home Builders Association and the Austin Board of Realtors.

Although the discussion was centered on Austin, the majority of the statements apply to what is happening in all Texas metros. Here are some of the major points about Austin from the fifth annual HBA/ABOR forecast.

Dr. Jay Hartzell, Chair of the Department of Finance in the McCombs School of Business at UT Austin gave us an overview of the world economy. As strong as our regional economy has been, it’s easy to forget that going into 2013, the global and national economy were still trying to shake off the fallout from the crisis of 2008-2009.

However, despite concerns about looming tax increases and government spending cuts, American employers added 155,000 jobs in December. Employees also enjoyed slightly faster wage growth and worked longer hours, which could bode well for future hiring. Job growth, almost exactly equal to the average monthly growth in the last two years, was enough to keep the unemployment rate steady at 7.8 percent, the Labor Department last Friday. But it was not enough to reduce the backlog of 12.2 million jobless workers, underscoring the challenge facing Washington politicians as they continue to wrestle over how to address the budget deficit.

Economically, we should continue to will feel the contrasting drafts of a retrenching uncertain government arm and a reviving private sector in 2013. The continued uncertainty of Washington will cause stiff fiscal headwinds during the first half of the year, stymieing growth for the first half. But by the second half, private business will continue their investment as well as bank lending and household spending on cars, homes, and the supporting industries.

Tougher mortgage lending rules
Tim Fisher, President of the Texas Mortgage Bankers Association, spoke about the future of mortgage financing, specifically rules and regulations put in place by the 2010 Dodd Franks financial regulatory bill. In short, mortgage lending isn’t going to get any easier. The upshot of this regulation is that banks are likely to narrow their loan offerings and rely more on thirty year fixed rate mortgages, a product unique to the US and one that has required a government guarantee. Currently, over 95% of all loans are backed or controlled by government backed agencies, which is something the Federal government would like to get away from.

The CFRB (Consumer Financial Protection Bureau) released new mortgage rules for qualified mortgages on Thursday of this week. The new rules come at a time when regulators and banks are trying to find a middle ground between overly lax and overly tight lending standards. For years the lending pendulum has never been just quite in the middle, either too lax or too harsh. 2013 looks like it will swing to the harsher side.

However, over a decade ago, mortgage lenders began broadening their base of customers (at the governments urging) by offering an array of exotic loan products with esoteric names: Subprime, Alt-A, low-doc and no-doc loans, and interest loans that required little to no verification or documentation to qualify. These loans went to millions of borrowers who ultimately couldn’t pay for them, and resulted in one of the worst financial crashes in the world in history.

The new guidelines and harsher parameters for both buyers and lenders will in all likelihood make it harder to qualify for a loan and from a lender standpoint, harder to lend. Because of this, mortgage lending will be a more difficult environment through 2013 – the bottom line is that it will be harder to qualify than it has in many years, slowing down home sales.

Eldon Rude, Metrostudy’s Director of the Austin market, discussed our local market and where it is headed for the year. Some of his major points were:

– The housing economy began to rebound this year both in absorption and prices
– Home sales, car sales, and retail sales are rebounding
– Real estate construction is underway. Drive around South Lamar, West Campus. Drive your new home   communities. There is a lot going on.
– More people working – as discussed last week, Austin at 5% unemployment is truly blessed. But then so is
  the whole of Texas, our state and major metros unemployment number continue to lead the nation

– Five years of pent up demand
– Americans have credit capacity again

Austin really saw the housing market continue its recovery in 2012, with strong increases in sales for both previously owned homes and new homes. Market watchers expect housing’s growth to continue through at least the next two years. But the industry faces challenges that include a still-shaky economy, a potentially tougher financial regulatory climate, and already-noticeable shortages in labor, finished lots, and building materials that will impede growth if they get worse.

That said, 2013 will be the year most remember as the first solid year of recovery for most of the country. Here in most of the Texas metros, consumers and realtors are likely to remember 2013 as the year when the real estate industry finally showed life after six years of dismal news.

Activity is expected to remain strong in 2013 as robust job growth, rising apartment rents and historically low mortgage interest rates result in more demand for housing in the Austin region.

Job growth
Driven by continued employment and population growth, the Austin economy should continue to outshine the rest of the nation. Analysts estimate that the region’s employment rate will experience a 3% growth rate while adding approximately 60,000 new residents annually over the next two years. This equates to around 30,000+ new jobs annually. This growth will bring Austin’s SMSA population to totaling over 1.9 million in total in the next two years.

Where is the job growth? While traditional employment leaders in Austin such as Dell and Advanced Micro Devices either contracted or remained flat in 2012, Apple, Samsung, Cirrus Logic, Intel, Mutual Mobile and Calxeda experienced growth. All have a part to play in the growth of mobile technology such as tablets and smart phones. This year Visa, Inc. announced that it was building a worldwide data center on Research Boulevard that is expected to staff almost 800 employees. General Motors is creating a 500 employee information technology center in Austin as part of the company’s push to use computer know-how to actively transform how the giant carmaker does business. 2013 should continue the streak of announcements improving Austin’s employment growth.

Because of this job growth, Austin’s rental market remains tight – this job growth puts pressure on development. In the last two years, the Austin apartment market has experienced strong increases in both rent and occupancy. As a result, rents have reached a historic high of $1.05 per square foot, and the current occupancy, at 96%, mirrors that seen during the heights of 2000. Annual figures show these numbers to be a 2.4% gain in occupancy and a 6.8% increase in rents. This leaves just under 4,000 rental units left for the 60,000 new Austinites when they move here. Even with the planned 8,800 units being delivered in the next 12 to 18 months, there is not enough units to house those moving here.

Limited inventory
As discussed above, not only have our local residential housing markets stabilized, but we have begun to see limited inventory in resales and new construction. Although it’s been a good year in resales (over 25,210 sold, nearly a 20% increase year over year) the amount of inventory currently offered in total is just over 5,700 units, 20 percent less than November 2011. Since this covers all price points this obviously is not enough to address demand.

New homes are just as challenged with lack of enough inventory. 2012 ended up at 7,981 starts, almost 700 more than previously projected. Eldon and Metrostudy are projecting the new home market could do as many as 9,000 starts in 2013 if there are enough ‘quality ‘ lots for the homebuyer.

The lack of developed lots and land continue to be the story for the Austin market. More housing starts in 2013 with less than an 18 month supply and little in the development pipeline. Remember it traditionally takes about two and a half years to buy a piece of land, get it entitled, and start construction of homes. So, anything bought today will take at least that long to come to market.

Labor and materials
Also limiting inventory is the construction labor shortage. This shortage is not only increasing the price of labor and putting pressure on margins, but also it is increasing the time it takes to build a house. The median labor wage hike nationally as well as locally is around 4+%, with a maximum of 15%. The slowdown and recession caused by the housing bubble forced many construction workers to move on to other jobs and put many production builder companies and subcontractors out of business. Labor will be more expensive.

In addition, because of the added demand materials are rising in price. The chart below shows how lumber has climbed as demand increased and the ability to increase production is not there. It’s not just lumber, all materials are seeing an increase in demand therefore putting pressure on prices. Don’t expect the discounted values of the last five years when looking for a home.

Construction and development costs will increase further in the time it takes to start and finish homes. A survey of builders locally, (and by no means scientific) shows that the average time it takes to start and finish a home in Austin, from start to finish, has climbed from four months to over five months. Some of the delays are being caused by shortages in the concrete and framing trades, causing problems in even the first construction phases. But not all of the start delays are being caused by worker shortages. It’s also taking builders longer to get permits because local municipal governments have cut staff. Getting first-time home buyers qualified for loans is another cause for delay. it has already begun to impact the time it takes to start and finish homes.

This is life on the other side of the housing crash. Home starts are climbing, prices are up, and builders can’t find enough workers.

Austin and Texas have been adding construction jobs since mid-2012, and some builders still can’t finish homes on time because framers, plumbers, and even cleanup crews are in such demand. Many skilled workers from before the recession have moved to better paying oil and gas jobs or moved back to Mexico. Potential new workers failed to get into the pipeline, because construction woes dragged on for so long.

As you can see by the chart below from Metrostudy, home prices in Dallas, Houston, Austin, and San Antonio have continued to increase.

Also compounding construction is that newcomers aren’t arriving from Mexico, at least not like in the past. They used to be a crucial labor source for the fast-growing business. Builders and subcontractors don’t want to be quoted on immigration, because it’s such a political issue, but they believe it’s a big factor in the labor shortage.

In April of 2012, the Pew Research Center estimated that net migration between the United States and Mexico had flattened and perhaps reversed from 2005 to 2010. In five years, slightly more people moved to Mexico, Pew said. A decade earlier, in a similar five-year period, almost 2.3 million more moved from Mexico to the U.S. Pew attributed the recent standstill to many factors, including the weak construction job market, tougher border enforcement, and a rise in deportations. As the economy picks up, the wave of Mexican immigration could resume.

Builders are hoping and counting on it. They’re OK with the labor shortage, partly because it’s better to manage a growing business. But they also hope it’s a temporary condition. As word spreads, they expect labor markets to respond, whether from the unemployed, other states, or Mexico.

Six years ago, housing starts peaked in Central Texas and then slowed. Only recently has the recovery looked solid and sustainable, so it actually feels good to have a labor shortage. Texas is ahead of the curve. While hiring here is up 5 percent in 2012, construction employment nationwide has been wallowing around the bottom for more than two years. As the market improves nationally, it will but pressure on raising labor prices which have been stagnant the last 6+ years, again adding to the cost of homes and construction.

There are potential hurdles this year. 2013 in Austin will start strong on home sales, but the rest of the nation will be slower through the first six months caused by the fiscal debate and the tightening mortgage climate. Locally, the availability of developed land and resale inventory will continue to be a challenge for buyers and another reason for sellers to raise prices.

Even with the hurdles mentioned, 2013’s forecast for Austin and the rest of the state will be head and shoulder above the remainder of the nation.