Texas housing markets (still) aren’t overvalued

The Austin Board of Realtors reported that the March 2015 median price for single family homes was $255,000, a 10% year-over-year increase. This is a record high for Austin homes, so it isn’t surprising that some are saying our market is overvalued or in a bubble.

Still, you can’t just look at appreciation and say the market is overvalued without looking at the reasons for the rise in prices. In relation to the other desirable cities that are creating 30,000+ jobs annually, our values are on the inexpensive side.

Texas has never led the nation in real estate appreciation. For the last forty years our state has averaged just under 4% annual according to Texas A&M Real Estate Center. Last year we saw 7.12% annual appreciation in Texas, according to FHFA House Price Index (HPI). During the housing bubble, Texas was at the bottom of real estate appreciation of all states, as you can see on this interactive map.

We’ve had a couple of good years in Texas after recovering faster than the rest of the nation. Speculation is hard in Texas, because the annual returns are not as great as in other markets. The speculation that many investors look for is not available in Texas; namely, those investors betting on appreciation rather than the fundamentals of income producing properties and/or historical sales prices. As long as job growth remains strong, Texas’s housing market likely won’t tank. Folks betting on appreciation might get hurt, but others will be fine.

It’s all about jobs

Again, job creation is driving demand and home values. From March 2014 to March 2015, Texas total nonfarm employment increased by 327,500 jobs, or 2.8%. The Texas unemployment rate was 4.2% for March 2015, down from 5.3% in March 2014. The Texas unemployment rate has been at or below the national rate for 99 consecutive months. Over the same period, Dallas had 4% job growth, ranking 5th nationally. The other major Texas metros missed the top 10: San Antonio grew by 3.4% (14th), Houston grew by 2.9% (22nd), Fort Worth grew by 2.6% (28th), and Austin by 2.5% (29th).

Whether the stronger home price appreciation in some Texas markets will lead to a bubble will depend on whether the employment growth here is sustainable in the long term. Most analysts think so. A continued drop in oil prices, or even a tech bubble burst, could curb demand for housing in hot Texas markets, and take some of the air out of the steady increase in values. Texas was among the first states to emerge from the 2007-09 Great Recession, surpassing its pre-recession employment peak in late 2011. Since 2000, change in Texas employment is up 24.9%, while the rest of the country is up 4.7%. Since 2000, Texas has created 2 million jobs, while the rest of the country combined has produced 5 million. As a whole, 29% of all new jobs since 2000 were created in Texas.

Remember the financial meltdown in the US was caused in part by not following the fundamentals of real estate. For every three jobs there should be one home start. Texas and its metros continue to be right in line with that. Those states where appreciation was in the mid 40% annually were pure speculation. It was a strong run, but based on non-sustainable fundamentals. Texas continues to have the fundamentals in building and consuming the shelter available presently.

Richard W. Fisher, president of the Federal Reserve Bank of Dallas, emphasizes Texas’s comparatively rapid rate of job creation. Over the last twenty-three years, the number of jobs has increased twice as fast in Texas as it has in the rest of the country. Many people might imagine that most of those new jobs pay low wages, but that turns out not to be true. To be sure, Texas has more minimum-wage jobs than any other state, and only Mississippi exceeds it with the most minimum-wage workers per capita. However if you consider cost of living, the Texas wages are better than most.

According to the Dallas Fed, only 28 percent of the jobs created in or relocated to Texas since 2001 pay in the lowest quarter of the nation’s wage distribution. By comparison, jobs paying in the top half account for about 45 percent of the new jobs in Texas.

This means that Texas has been creating or attracting middle and high wage jobs at a far faster pace than the rest of the country taken as whole. For example, between 2001 and 2012, the number of Texas jobs in the upper-middle quarter of the nation’s wage distribution increased by 25.6 percent. This compares with a 4.1 percent decline in the number of such jobs outside of Texas. Though coming off a comparatively small base, Texas has also outperformed the rest of the country in its growth of high-paying jobs.

That’s a big deal. During the last decade, the country as a whole experienced zero net job creation, and the decline in middle-class jobs is arguably the largest single threat to the national economy’s viability. Only 65 counties out of just over 3,000 have fully recovered real estate values, employment, and GDP to prerecession numbers. Nationally the country continues to struggle. Much of these statistics come from an article from the Federal Reserve Bank of Dallas, 1Q14.

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Appreciation isn’t the only factor in determining if a market is overvalued. Here are some other metrics to watch:

  • Job creation vs. home starts (a ratio of three jobs to one home start is balanced)
  • Resale housing inventory: less than six months is considered a sellers’ market
  • Less than 24 months supply of new home starts
  • Less than 24 months supply of lot inventory
  • Rental occupancy residentially above 90% with no concessions
  • Double digit appreciation for more than three years

When there has been job creation but an absence of developing and building there will be a need for more inventory as the market plays catch up. That is where our Texas metros are; playing catch up, not overvalued or undervalued. With true demand from population and employment growth the metro markets have a ways to go to catch up.

Those of us who have been watching and analyzing Texas real estate will be the first to tell you that we don’t know the future. History has taught us differently. Even if Texas metros are a good market now doesn’t mean in 18 months or 5 years that it still will be a good market. But by reviewing past regional history against national metrics, we can say confidently that the regional market will be strong for at least the next three years based on jobs, population, affordability, and demographics.

The speculative building that we saw regionally in the 80’s here in Texas and the same in the sand states (California, Nevada, Arizona and Florida) in the early 2000’s is not present today. Double digit appreciation as a region is not present. Are these things that bear watching? Absolutely. Remember that although the headline of “x market is overvalued” gets attention, to most long term analysts and economists appreciation is just one of many statistics, and all the fundamentals need to be reviewed to make a true assessment.


Is Texas overvalued?

Last week, the media picked up an article by one of the major real estate media outlets on the ‘overvalued’ Texas metros real estate.

The real estate and financial collapse of the last decade — a once-in-a-century financial crisis and recession — is not something most folks are excited to see repeated. Many parameters since the crash have been put in place to discourage another bubble and crash. Mortgage lending is tremendously harsher than it was 10 years ago, potentially excluding 3 to 7% of the total market from qualifying for home mortgages.

The housing market nationally is at about 40 to 50% of production / sales of where it was pre-recession. The last couple of years have been healthier, with Texas real estate in 2012-13 really showing strength.

Yet, after the real estate bubble, when any ‘hard asset’ market shows strength, the naysayers seem to take delight in looking for the next bubble collapse, whether it is in gold, stocks, Bitcoin, real estate, etc. I am not well versed in many of these, but know well the history, demand, and forecast of the Texas economy, having watched and participated in it over the last fifty years.

After a number of years of declining or stagnating housing prices, the market turned around big time in 2012-13, making some analysts and naysayers worry that we’re seeing the beginnings of Housing Bubble 2.0. The concern for housing bubbles is real, wherever you live.

However, there is a long way to go before the regional market begins to show those signs. Here in Texas we are not seeing this based on economics 101 – supply and demand. Are we overvalued? No. I am sure that if you delve deep enough into all the regional properties available, there are some that are overvalued. But as an overall market this is not true.

For those who are not familiar with the Texas’s history during the recession, it came out fairly unscathed with real estate values and employment leading the nation. During the bubble years when the sand states (California, Nevada, Arizona, and Florida) were leading the nation in appreciation (40+% annual), Texas was near dead last in home price appreciation, with less than 3% annual appreciation for a number of years. Texas was 50th in appreciation for a couple of years. We may have climbed up to 47th or so, but the runaway real estate speculation of the bubble states was just not available here to those looking for a ‘quick buck’.


So to the point I am addressing, one of the major real estate media sources has named a number of our Texas region metros as ‘bubble markets’ to watch. Their basis is on tracking home prices across the country to see which markets are over and undervalued. In a forthcoming “Bubble Watch” report, they find that while most of the U.S. real estate market remains significantly undervalued, there are certain markets that feel are straying into bubble territory.

Realize that they are a media source, not a real estate broker. They are a very knowledgeable source but they make their money on advertising rather than real estate investment. We have a great deal of respect for the chief economist and his findings, but to call Austin and the other regional markets overvalued? Compared to what? You cannot compare to history, Texas and Austin appreciation has been one of the lowest in the country over the last 10 years. Check with the national sources such as OFHEO, FHFA, or Corelogic index.

Their methodology looks at whether home prices are overvalued or undervalued relative to their fundamental value by comparing prices today with historical prices, incomes, and rents. The more prices are overvalued relative to fundamentals, the closer they feel we are to a housing bubble – and the bigger the risk of a future price crash. By their own admission, ‘Recent price changes, by themselves, cannot tell us whether this is a housing bubble; neither can a simple comparison of nominal price levels today to where they were in the past.“

They then combine these various measures of value rather than relying on a single factor, because no one measure is perfect. In doing that markets in California, Orange county and Los Angeles are more than 10% overvalued. But where I argue is that they also showed the Austin, Texas market at 10% overvalued, while 7 other markets range from 4% to 7% overvalued. Those include:

• San Antonio, TX;
• Honolulu, HI;
• San Francisco, CA;
• Houston, TX;
• Riverside-San Bernandino, CA
• Oakland, CA

Unsurprisingly, these markets are where job creation has lead the nation, in Texas and California, which have also seen double digit home appreciation over the past year, with Orange County real estate appreciating a strong 23.4% since October of 2012.

So are we in danger of another housing bubble like we experienced last decade? Not quite yet, at least nationally. We cannot comment on those markets outside of Texas. According to their data, the national market remains roughly 4% undervalued overall. And in some markets, like Cleveland, Ohio and Palm Bay-Melborne-Titusville, Florida, home prices are still 20% below their fundamental value yet they do not have the employment growth or demand of the Texas region. Furthermore, even the most frothy markets are less overvalued than the national market was in 2004, when home prices were 24% overvalued nationally.

Starting with residential home values, Austin, San Antonio, D/FW and Houston metros are still challenged in inventory with all having less than 6 months inventory. Analysts at Texas A&M Real Estate Center will tell you that 6 months worth of inventory is equilibrium. Below that it becomes a seller’s market (a market where lack of inventory makes values improve). Above that mark of 6 months, supply dictates an easing of values, making it more of a buyer’s market. So based on demand and supply this market does not seem to be overvalued presently and with current absorption and employment projections, it will be 2 to 3 years at least before this could become an issue.

Looking at residential rental, the market demand currently has been outstripping demand for the last 2 to 3 years, even with near record supply of apartments being built in all Texas metros. Supply at some point should outstrip demand, right? It may happen soon in Austin, San Antonio or D/FW based on current construction. But demand has outstripped supply as shown by the lack of concessions or lower occupancy. Rental values over the last 10 years have appreciated over 50% with home values around 35%. Demand has kept values strong.

One of the things to keep in mind about current demand vs. prerecession is that the non-30 straight rate, 5% to 10% down programs that are prevalent now, were in the minority pre-recession when sales, values, appreciation, and speculation were stronger. The ability to have a bubble in real estate is more restrictive now.

Overvalue is overstated presently in the local regional markets. In other words, the real estate and financial world has changed. Younger families are unable to qualify. Young people have not gotten the economic traction since the recession. Even the ones who can aren’t getting mortgages because credit is much tighter than it was in the pre-bubble years, and recent price increases have been fueled by over-enthusiastic investors rather than true economy-wide demand for housing. Every real estate analyst is forced to used assumptions when forecasting the future prices of homes, and given the fact that home price appreciation in Texas has been healthy for a couple of years, may be going too far in arguing that certain Texas metro markets are overvalued bringing thoughts of another bubble.
Let’s look at appreciation from another source: Corelogic, an analytics company with lots of data. When you look at the following chart you can see that a number of states have had stronger appreciation than the Texas region.

voice graph 1 10-10

Another chart shows annual metro appreciation and supports the same conclusion of good appreciation, but not overvalued.

voice graph 10-10

Texas metros are not overvalued

In all Texas metros demand is outstripping supply and the entitlement and lending process have a way of governing development and building. Will Texas and it metros overdevelop and build in the future? Absolutely, the advantage of a free market is the ability to market real estate if you can get the financing. the market dictates whether the market is overbuilt or not. The market has a way of self correcting. All of our metros seem to be a few years away from slowing. Austin, which led the list of overvalued markets in Texas, has the longest entitlement process of approval, meaning supply will take a while to catch up to demand.

It’s still cheaper to buy than rent. If you live in a metropolitan area, it may make more financial sense to buy a home than rent a house, condo, or apartment. According to a to this same real estate media source study, buying a home is 44 percent cheaper than renting in the 100 largest metro areas in the United States. While this data was calculated based on last year’s lower mortgage rates, there is still a significant price difference in total monthly costs with today’s rates. And again income vs. home value is tremendously better in Texas than almost any other state that is creating jobs.

Comparatively, home prices are relatively low. Housing price trends vary significantly by location and even by neighborhood, but the average housing price trends across the country look promising for prospective homebuyers looking at Texas versus their current state. The S&P/Case-Shiller composite index of 20 metropolitan areas increased only 1 percent this past season, so 2014/15 could still be a great time to buy.

Because of the lack of dramatic appreciation, there is less competition from home flippers. Housing prices in some markets are increasing, making house flipping attractive. But in Texas it has historically been a lower appreciation value. This gives prospective homebuyers more inventory to choose from and the benefit of having less pressure to close a deal because of another pending offer. This could be the time to enjoy the freedom of shopping around for that perfect home and making an offer.

The majority of renters would like to avoid the cost of rising rent. A buyer’s market means it might be time to say goodbye to renting for good, but Texas is a seller’s market. That said, rent increases historically go up quicker than appreciation. So as you look at shrinking housing dollars at your current location or want to move but will experience a spike in rent, consider the benefits of buying a home instead. You may be able to secure a great rate with your credit history and end up paying the equivalent or less in monthly payments as you build equity in a home. Renting can be a more affordable option for the short term, but renters still have to face rising rental costs year after year.

Presently with Texas real estate being undervalued, there is not a more affordable time to buy. Buying a home gives you a chance to start building equity, and you are investing in your future. Even if you end up selling your home in five or ten years, you could profit from the sale and invest that money elsewhere. If you’ve been dealing with rising rent or the hassles of costly moves for the past few years, settling in to a home can stabilize your housing expenses – especially if you get a fixed-rate loan at a great rate. You won’t have to worry about your monthly housing expenses changing significantly for a few years, and you will pay for something that has more value than a rental property. Consider the benefits of making this type of contribution to your future month after month. Of all the regional markets, look what region has had consistent growth over the last 10 years. Not necessarily explosive appreciation, but affordable. Now is the time to buy in Texas!

One of the enduring lessons of the last real estate bubble is that while there are many reasons to buy a house — like the tax-deductibility of mortgage debt, the forced savings mechanism of paying a mortgage, and the pride of homeownership — expecting unrealistic significant appreciation in your home’s value shouldn’t be one of them. If you are looking at the value or your home / real estate it is more important to look at the last 5 to 10 years history to decide if it is overvalued. Looking at a snapshot, is just that; a partial picture of the total.

Metropolitan job growth drives demand for all real estate channels

The median price for homes in the state of Texas hit another all-time high in June 2014 in the four major metros, and demand for homes in the state continues to be strong, but demand has seems to reached a plateau in the last couple of months with values and rents continuing to remain strong while sales have dropped slightly. Office, retail, and most commercial channels continue to have strong absorption with few concessions.

On a statewide basis, 295,769 single-family homes were sold in the last 12 months, up 10.73% from the previous 12 months. This represents the most homes sold in a single year since the boom years of 2005-2006. However, in August 2014, there were 27,999 sales of existing single-family homes, 1.2 percent less than in August 2013.

Continuing the steady increase seen in recent years, prices for Texas homes were extremely strong in the second quarter, hitting an all-time high for the quarter. The median price in 2Q 2014 was up 5.87% from the prior year, reaching $187,300. The average price rose 5.28% from the prior year to $246,209. According to the Texas Association of Realtors, those are the highest figures for median and average price ever seen in Texas real estate.

Texas and California continue to lead the nation in job growth, with Texas capturing over 40% of all jobs created in the country in the last 12 months. The effect on local residential markets has been dramatic.


Austin continues to create jobs and have one of the most healthy labor and real estate markets in the state. Although Austin will probably have a record year in resales, the lack of supply of resales and new homes continues to present challenges to buyers. Austin area home sales declined for the second consecutive month in August 2014 as rising home prices and housing affordability issues continue to affect the Austin-area housing market. Austin area home sales decreased four percent year-over-year to 2,835 single-family home sales in August 2014. Resale home inventory continues to dwindle in September of this year, hitting just 3 months (6 months is considered the equilibrium of a sellers and buyers market).

Austin is looking at 9,800 to 10,000 new home starts this year. Delivery has begun to catch up to demand, with builders aggressively looking for developed lots to meet demand, but also seeing a slowing demand for speculative inventory over $500k. The production builders who are able to deliver homes under $250,000 continue to have more demand than product.

Austin not only has one of the state’s lowest unemployment numbers (4.6%), but has been creating 22,000 to 30,000+ jobs for the last three years. Traditionally, for every two jobs there should be one housing start, however with rates creeping up around a point, cost of land, materials and labor, there has been a shift of buyers pushed to rentals. The new formula is closer to three jobs for one housing start. The new employees still need shelter, however their options now are limited to resale or rental. The good news is that demand is still strong in the $250,000 and below price range and apartments continue to lease with little to no concessions. The statement about rental concessions is significant, seeing that Austin as well as the other metros have been leading the nation’s apartment construction for the last 3 years, leading many analysts to think that overbuilding is a risk. However, due to the demand rents and occupancy continues to lead the state.

A majority of Austin area homes are now priced out of an affordable range for first-time and first-time move up homebuyers, where a significant portion of home sales historically occurs (30+% historically, now around 7%). According to the latest ABOR report, the median price for single-family homes jumped 11 percent year-over-year to $247,500 and average price rose nine percent year-over-year to $311,414. Single-family homes continued to sell quickly as they spent an average 42 days on the market, one day fewer than August 2013.

San Antonio

San Antonio remains on track to end the year with job growth in the 2.5 to 2.6 percent range, a 2.5 percent rate means the area will produce a net gain of about 22,800 jobs this year. The job-growth rate is mostly good news. It’s faster than both the national rate and San Antonio’s long-term job-growth pace. But it’s slower than the forecast for Texas as a whole with San Antonio’s job growth between July 2013 and July 2014 at 2.17 percent, which is below the state’s 3.22 percent but higher than the U.S. pace of 1.88 percent. All other large Texas cities except Dallas were higher than San Antonio during that period. Last year was a bit of a struggle due to the high number of civil defense job layoffs (85,000+/- in Texas affecting El Paso/ Fort Bliss, Killeen / Fort Hood, and San Antonio / Fort Sam Houston, Lackland Air Force Base, and Randolph Air Force Base), however this year San Antonio has averaged under 5% unemployment, a number that a number of national metros covet. So even with the layoffs, the market has gained traction in most areas.

With one of the nation’s largest oil shale plays nearby and the increase in high tech jobs, the market will be challenged to meet demand. Resale inventory is at a six year low with just over 4.5 months supply and most properties selling for near full list price (95+%). Apartment occupancy is just under 92% with rents rising above a $1.00 per square foot. While this is not as robust as other Texas metros, it is still attractive for many investors. The good news is the rental market remains strong even with new units coming to the market. Like Austin, the lack of completed developed lots is a challenge and has led to tremendous activity in large land tract sales to builders and developers.


Dallas / Fort Worth continued to improve this year with a healthy 120,800+ jobs created in the last 12 months, led by the professional and business sector with over 45,800 jobs. This surge of quality jobs has created housing demand.

Over 15,200+ apartments are to be delivered over the next 12 months with occupancy staying above 94+%. Multifamily construction and completions have picked up significantly in the Dallas/Fort Worth region. That would normally cause concern for equity as supply could outstrip demand. However, substantial growth in the Dallas/Fort Worth economy and other demand drivers have helped maintain absorption enough to mute the effect of elevated supply. The Metroplex market demand for new product class ‘A’ has been strong, and ‘B’ and ‘C’ class demand remains strong as well. Such demand has prevented significant occupancy declines, giving apartment management and owner’s confidence to continue raising rents. In particular, middle- and lower-tier market segments in the Dallas metro have exceeded rent growth expectations.

The big questions moving forward are: can the middle and lower tiers maintain that pace, and how long can top-tier units continue to show few side effects from apartment development and a strong single-family home market – especially now that (presumably) much of the pent-up demand will begin to be burned off? In particular, the Metroplex’s ability to absorb new apartment product will face more trying tests going forward, as 14-year high construction volumes promise to push supply levels even further over the next two years.

The lack of resale listings is slowing home sales in most desirable Dallas-area residential districts. The inventory of homes being marketed by Realtors has fallen to less than a 2.5 month supply in the Metroplex, allowing values to continue to improve. The second quarter of 2014 improved over 45% from the first quarter, but demand has slipped a little, 2.5% less than this time last year.

Home starts and development will remain strong for the rest of 2014 and into 2015, with developers / builders following the same script of the other Texas metros in trying to secure as much land as possible. In contrast to the roaring growth in multifamily, single-family home construction has increased at a more gradual pace. The slower growth is partly due to constraints on the supply side, such as a shortage of developed lots, higher construction costs, and widespread labor shortages. Dallas home price appreciation is slowing, increasing 0.2 percent in the second quarter, according to the Federal Housing Finance Agency purchase-only house price index. Year over year, prices are up 6.5 percent.

Like most of the Texas metros, the Dallas / Fort worth area is still facing an inventory shortage. A steady, ongoing supply of new housing stock — particularly in the entry level and first-time move-up market – continue to face challenges. This channel was over 30% of the market and has fallen to less than 10%. These homebuyers represent a large majority of home sales historically and their equity growth and ability to move up will be crucial to Texas housing market growth.

Office markets are healthy, as Dallas/Fort Worth’s office market continues to improve this year as corporate expansions and relocations improve job creation and boost office demand. A great example was the market’s ability to recover relatively quickly from large corporate move outs. Plano, for example, was dealt a blow late last year from Encana Corp.’s (Canadian natural gas company) decision to vacate its newly built offices, but the city has since been selected by FedEx and Toyota for their new corporate headquarters. Combined, these two relocations alone will bring an estimated 5,200 jobs to the area within five years and will attract secondary supporting firms. The Metroplex has shown an envious ability to recover from overdevelopment and building the last few years. A great example is Richardson where over 30% of all office space was available for lease just five years ago, but the corporate campuses for State Farm and Raytheon has sparked a dramatic turnaround in recent quarters. Downtown Dallas has also received a boost from major office-using tenants, with Tenet Healthcare leasing 242,000 square feet and Santander Consumer USA committing to 350,000 square feet in the area. In Fort Worth, the North submarket, which includes Alliance, reports the lowest vacancy rate, though the Northeast and Mid-Cities areas recorded the most tightening over the past year.


The Houston economy continues to lead the nation with over 112,000+ jobs created in the last 12 months. To say the economy is doing well is an understatement. Houston continues to remain strong with a booming energy market, strong trade, and surging real estate development activity. If you have not been able to go to the Woodlands in the last year, you need to take a field trip. The relocation of Exxon and Occidental to the area has caused tremendous growth that has to be seen to be believed. Demand in all channels in this 30,000+ acre community is off the charts.

Although it is off the 2009 high of over 20,000 new apartments delivered, Houston continues to have strong construction in the apartment sector. 2014 should have 12,000+ apartment units being deliver this year, and rental occupancy has stayed steady at 94%. Resale and new home sales struggle with the tremendous demand for inventory, although we saw sales slow this September. Like all of the Texas metros, resale is definitively a seller’s market with just a 3.2 month supply. Like the rest of Texas, land developers of residential, office, and retail are quickly securing positions and starting construction to address the demand.

Citywide, August delivered gains in both residential home sales volume and prices. Housing inventory held steady month-over-month, but is tracking slightly below 2013 levels. While prices were the highest for an August on record, they fell short of the all-time records set in June 2014. Single-family home sales were up tad, at 1.1 percent versus August 2013. Months of inventory, which estimates how long it will take to deplete current active housing inventory based on the previous 12 months of sales activity, matched July’s 3.0-months supply, lower than the 3.3-months supply of last August. It is significantly below the current national supply of 5.5 months of inventory.
Residential values continue to show the strength of the market, with the average price of a single-family home up 6.4 percent year-over-year to $275,369. The median price jumped 10.4 percent to $206,000.

The tremendous job growth and corporate expansion continues to intensify in Houston, driving demand for office space and sparking a construction boom. This year, developers will complete more than 11 million square feet of office space in the metro, which represents the highest total on record since at least the turn of the new millennium. Pre-leased office towers and build-to-suits will account for a sizable share of deliveries through 2014-15, and demand appears strong enough to absorb much of the new construction that remains available. Approximately 85% of the 4.4 million square feet delivered in the first half has been spoken for, and pre-leasing of buildings slated for completion over the balance of the year already exceeds 70%. The market’s recent performance and a dwindling supply of large blocks of Class A space suitable for corporate tenants have renewed speculative development in the metro.


After reviewing most of the state, residential sales demand has slowed, yet values continue to improve, and will allow somewhere between 5-7% appreciation of most residential real estate throughout the state. This lack of sales demand is to be expected with new and resale inventory improving. Even with the tremendous growth Texas has seen over the last number of years, with supply improving, values will remain strong but may be challenged to continue. They should still see appreciation, just not to the degree we saw in 2013. Other channels of real estate will bear watching throughout the state, since many are at a ‘tipping point’ of supply overwhelming demand.

With such strong supply and continued demand, the inventory of Texas resale homes has remained in a ‘sellers’ market. The Texas market had 3.7 months of inventory, and has remained there much of the year. A 6-month supply of homes in a market indicates a balance of supply and demand. The Texas inventory supply indicates strong demand for homes of all values, but particularly entry level.

The point of this exercise is that with mortgage rates and home values continuing to increase, Texas metros as well as many smaller towns continue to see appreciation to the point that waiting to buy does not make sense. The home you look at today will not be there tomorrow. Whether this is just a couple of years of appreciation or a longer cycle for the majority of the state has yet to be seen. However, it is safe to say that buying today is a wise investment.

Continued job growth drives strong Texas real estate market

The median price for homes in the state of Texas hit another all-time high in September 2013 in the four major metros, and demand for homes in the state continues to surge to record levels, increasing home values and rents.

On a statewide basis, 271,839 single-family homes were sold in the last 12 months, up 17% from the previous 12 months. This represents the most homes sold in a single year outside of the boom years of 2005. Additionally, demand in the state was as hot as ever, with 43 out of the 47 markets followed by the Texas A&M Real Estate Center showing an increase in sales year-over-year.

Prices for Texas homes were extremely strong in the second quarter, hitting an all-time high for the quarter. The median price in 2013-Q2 was up 9.98% from the prior year, reaching $177,300. The average price rose 10.44% from the prior year to $235,075. According to the Texas Association of Realtors, those are the highest figures for median and average price ever seen in Texas real estate.

Texas and California continue to lead the nation in job growth with Texas capturing over 40% of all jobs created in the country since 2009. What effect has that had on the local residential markets?


Austin continues to create jobs and has one of the healthiest labor and real estate markets in the state. Although Austin will probably have a record year in resales, the lack of supply of resales and new homes continues to present challenges to buyers. Resale home inventory continues to dwindle, with just 2.7 months supply available, dropping from 3.7 months supply in August. Builders will deliver 9,200 new home starts this year. Builders are happy that demand is outstripping supply, but are scrambling for developed lots to meet demand. Austin has one of the states lowest unemployment numbers (5.2%) and has been creating 22,000 to 30,000+ jobs per year over the last three years. Remember for every two jobs there should be one housing start, so the new home market has to play catch-up for the last few years. Due to the longer entitlement process in Austin, it will be two to three years before lot development catches up to demand, which in a broader perspective is a “good problem” to have.

San Antonio

San Antonio also has strong job and population growth across the metro, accelerating demand for shelter. With one of the largest oil shale plays nearby and an increase in high tech jobs, the market will be challenged to meet demand. Resale inventory is at a six year low with just over 4.5 months supply and most properties selling for near full list price (97+%). Apartment occupancy remains strong at around 95%, even with new units coming to the market. Like Austin, the lack of completed developed lots is a challenge and has led to tremendous activity in large land tract sales to builders and developers.


The Metroplex economy continued to improve this year with 92,000+ jobs created in the last 12 months, led by the professional and business sector with over 21,000 jobs. This strong demand has been tempered by the reduction in forces in the banking and mortgage industry. This surge of quality jobs has created housing demand. Over 13,500 apartments are to be delivered over the next 12 months, with occupancy staying above 93%. The lack of listings is slowing home sales in most Dallas-area residential districts. The inventory of homes being marketed by Realtors has fallen to less than a two-month supply in the Metroplex. In addition, the number of pre-owned single-family home listings in North Texas is down 14% year-over-year, according to data from the Real Estate Center at Texas A&M University. The rest of 2013 and into 2014 should remain strong as developers try to secure as much land as possible for future deliveries.


Houston is the nation’s #1 job creating city. With over 106,000 jobs added in the last 12 months, to say the economy is doing well is an understatement. Houston continues to remain strong with a booming energy market, strong trade, and surging real estate development activity. The level of development in this area is unbelievable. Last time I was in the Woodlands we counted 37 cranes just from 290 to the business district in the middle of the community. West Houston has the same amount of construction. Even with over 10,000+ apartment units being deliver this year, occupancy has stayed steady at 92+%. Resale and new construction struggle with the tremendous demand for inventory, although we saw a slower September. Resale is definitively a sellers market with just a 3.2 month supply. Like the rest of Texas, land developers of residential, office, and retail are quickly securing positions and starting construction to address the demand. If you were to list the strongest markets in Texas, Houston would easily lead.

Bryan/College Station

Bryan/College Station is another bright spot in the Texas triangle that has seen new home and resales improving over 30% and values following. As in the other metros within the triangle, inventory is lower than a year ago and dropped to less then six months this year. Texas A&M’s continued growth should help this areas continued growth through 2014.


Beaumont saw improvement in values and sales over the last 12 months. Beaumont is one of the few Texas markets where the last four years have been a ‘U’ shaped curve due to the loss of jobs and since then improved job creation. Golden Pass LNG’s expansion in Sabine Pass is expected to create thousands of jobs and generate billions of dollars in investments. We have seen the average price for sold homes move dramatically from $143,839 a year ago to $241,162. This was on the heels of a 45.8% decline in June from a year earlier. Thank goodness that energy has brought strength back to the market.


The real estate market in Amarillo has remained flat (literally as well as figuratively) through 2013, mostly due to a lack of job creation. The good news is that it has become more of a sellers market with resale inventory remaining under equilibrium for the last 11 months. Median values have improved to $139,700 with slow employment growth. Amarillo continues to have the same challenge that most of rural America has: population and employment stagnation. An oversupply of resale properties and little to no job growth has kept things slow for 2013 and through 2014

El Paso

El Paso has maintained strength even with the defense cuts affecting Fort Bliss. Although job creation has suffered this year, the strength of the local market has helped the real estate market continue to move in an upward direction. The median sales price is up 4.9% year to date over last year to $138,600. The number of homes sold has increased 5.3%. The supply of homes on the market has decreased from 8.1 months to 7.3 months. This fast growing population has helped El Paso climb five notches on the Milken Institutes latest Best Performing Cities Index, ranking ninth out of the nation’s 200 metro areas. El Paso did not see the boom price surges as the rest of Texas, so they have seen continued appreciation in new and resales.


In Lubbock closings of new homes increased year-over-year in July, and the market seemed to be hinting at strengthening with a percentage hike more robust than June 2013. The market has been driven by campus enrollment, rather than job creation. There was a 50%+ jump in new home closings from a year earlier. Closings of new and existing homes gained in July after staying steady in June from a year earlier. The average per-unit price of newly sold homes jumped year-over-year to $247,395 in July, up 21.1% from last year. This rise is better than the 10.4% boost in June year-over-year.


Abilene has seen improvement in resales this year, and the natural gas boom has added more jobs for the area and should continue to be beneficial for the local economy. Any boom in real estate, however, is unlikely as Abilene moves back into the sort of slow paced market it has been for years. As in other Texas markets, we saw fewer sales and continued appreciation recently. New and used sales are slow and will continue through 2014.


In the last five years three Texas towns had benefited from the military realignment: San Antonio, El Paso, and Killeen. Fort Hood in Killeen is one of the largest United States military installations in the world. At the top of the market, Killeen was doing about 5,000 sales annually. It has dropped to a good pace of about 2,500 home sales with about 700 new home starts. Although sales are slower, values as in other areas of Texas have maintained and appreciated slightly, because of the lack of available real estate. Again the reduction in force caused by the defense layoffs and the near 17 billion lost from the budget impasse at the start of the year has been covered by the continued good fortune of job creation in surrounding towns.

We should continue to see 5 to 10% appreciation of most residential real estate in Texas’s major metros. While this improvement in sales and values is welcome, areas outside of the major metros and oil/gas boom areas will continue to be challenged.

Most of our state did not have the big price drops we saw in the rest of the country, so to see 10% price increases on top of properties that held value in recent years means we’re seeing even more significant growth in Texas over the next few years.

With such strong demand, the inventory of Texas homes has decreased 32.5% year-over-year, to 3.9 months of inventory. A 6-month supply of homes in a market indicates a balance of inventory and demand. The Texas inventory levels indicates strong demand for homes and a seller’s market.

Texas metros as well as many smaller towns will see price appreciation to the point that waiting to buy does not make sense. Whether this is just a couple of year’s appreciation or a longer cycle for the majority of the state is yet to be seen. However, it is safe to say that buying today is a wise investment.

Is now the time to sell?

With the booming real estate market in Texas, many who own property are wondering if now is a good time to sell. In terms of inventory and sales pace, we are in a seller’s market, so the basic answer is “yes” – with a grain of salt. This is the best time in the last decade to sell if you own property in Texas. Residential sales are coming off record sales months in all four major Texas metros with continued demand for more housing inventory. Priced appropriately, most residential properties sell within 90 days. With current and projected job creation, the residential real estate market should continue to appreciate for the next few years.

Based on the current market, many believe now may be a perfect time to put your house or investment property on the market. Brokers are clamoring for inventory and builders are scrambling for land and lots. All metros are at their lowest level of inventory in years.

Texas rural markets are doing better also after a number of slow years. 2012 was one of the most active transaction years since 2008. The concerns of values dropping (which they did in 2008/09) seems to have gone away as more transactions happened in 2012. This in turn helped values state wide, with the central Texas area leading the state with a 6% increase in values sold over the previous year. To put things in perspective, realize that Texas leads the nation in number of farms and ranches, with 247,500 farms and ranches covering 130.4 million acres as well as the highest average value of farm and ranch real estate in any state.


Supply is going to increase over the next few years due to demand. As I said above, we are in a seller’s market – that is, there is less than six months of inventory available in most real estate channels. Builders and developers are currently scrambling to deliver new product in the construction pipeline to meet demand. So, before this new inventory hits the market, it would be a good time to sell.

Foreclosures are basically a non-factor in Texas. They represent less than 1.5% of the total market. Yes, in any market, including great ones, there are always some foreclosures, and foreclosures near your property can affect its value. That said, foreclosures have very little impact currently on Texas values. Nationally as well as regionally, many expect inventory to continue to rise as 3.2 million homeowners escape the inability to sell because of negative equity in the last 12 months and an additional 1.9 million are expected to enter positive equity in the next 12 months.

Within the next year, Austin, Houston, and San Antonio will see increased land, lots and housing inventory. A year ago, most equity was not interested in financing new real estate. This is no longer true with most Texas metros seeing a huge influx of interest in the metro markets. Selling now while demand is high and before supply increases may garner you your best price.

Appreciation has been good this year and should continue for at least another year based on demand and inventory. Values will continue to improve, but should slow as more competition comes on line in the coming next few years. And barring another financial catastrophe, the values created in the last few years will stick and improve as you hold your real estate longer. Remember, slow and steady appreciation wins the race. Your greedy side wants double digit appreciation, but I will tell you that that type of growth is unhealthy. The lack of that type of growth is what kept our regional markets healthy when the boom was in full swing. Remember appreciation of 30% or more in any asset, has historically proven to be a ‘bubble’, an economic term none of us want to see again.

Construction is back

Construction is stronger than it has been in years. The cranes on the horizon of Houston and Austin make it obvious that construction is coming back. On top of that, the ‘shale boom’ has put pressure on quality labor as wages have increased dramatically to compete. The cost to build is going to be more expensive in materials and labor, so values will continue to increase for a while.

The number of new developments in the pipeline has increased. One of the products of an improving market is new development, which has been missing in all Texas metros over the last five years. Needless to say we have seen a dramatic increase in the number of new developments being filed. Locally in Austin and San Antonio we saw a surge in land purchases just over two years ago. We are again seeing a renewed interest in land development purchases as builders look to fill their pipeline for 2016 and beyond.

Over the last several years, most homeowners selling their homes did not have to compete with new construction project around the block. As the market is recovering, more and more builders are jumping back in. Another phenomena of the current market, is the strong increase of in-fill urban developments and homes. Traditionally in Texas, new homes were built in the suburbs. The only new urban construction was typically remodel. However due to the needs of the market, Austin and Houston are seeing strong increase in urban building outside of the CBD condos. These new homes will again become competition as they are an attractive alternative for many purchasers. With this added competition, many residential sellers will need to look to modernize their homes as they come on the market, as to make them attractive against geographically close competition.

Interest rates are rising

With the healing of the national market (as well as the manipulations of the Federal Reserve), interest rates are rising. We have see rates jump more than a full point since the beginning of the year. The Mortgage Bankers Association, Fannie Mae, Freddie Mac, and the National Association of Realtors are in unison projecting that rates will continue to climb. Whether you are moving up or moving down, your housing expense will be more a year from now if a mortgage is necessary to purchase your next home. Again remember with every 1 point of increase, the buyer loses 12% buying power. We knew this day was going to come when rates would increase. The good news, is that this is a sign of a healing economy. If rates go back down, we have a problem. For those of you that don’t follow rates, According to Freddie Mac’s Primary Mortgage Market Survey, interest rates for a 30-year mortgage have shot up to 4.57%, which again is more than a point since the first of the year.

An important question

If you are going to sell, where are you going to buy? A word to the wise, whether it is your own personal home or investment property, in the current market you need to have something ready to move to. All the factors from above are going to affect your buying possibilities and potential. Whether it is the need to find something in the same neighborhood or the tax need to reinvest, the current Texas real estate market is tight enough that it is hard to find a replacement. Many sellers come to the realization that it is a great time to sell, but buying in the same area brings challenges due to the strength of the market. Before you sell I would strongly advise that you have something lined up.

Look at why you are thinking about selling and decide whether it is worth waiting. Is the possibility of a few extra dollars more important than being with friends and family and staying where your kids have grown attached to? Laugh if you want to, but the older I get, the more I realize the importance of habits and being comfortable and familiar with my neighborhood.

You already know the answers to the questions we just asked. You have the power to take back control of your situation by putting your house on the market today. The time may have come for you and your family to move on. Whatever the decision is, realize that you are blessed to live in as strong a regional market. Also, realize that keeping your family happy is paramount. If you want to stay put, and that makes everyone happy, forget about the appreciation.

A closer look at the unemployment picture

We received mixed new on the economy this month. On the one hand, real estate prices are up, GDP growth has improved, and the headline unemployment rate fell to 7.4%. On the other hand, a more detailed look at the unemployment situation reveals that we still have a long way to go to full recovery nationally.

Unemployment has improved but seems to be stuck at 7.4% nationally. Texas is faring better – the state unemployment rate is at 6.5%, Austin 5.4%, Houston 6.1%, DFW 6.6%, and San Antonio 6.7%. In July, only 92,000 of the 266,000 jobs created were full-time — just 35% of the total. You may wonder why the total number of jobs created isn’t 162,000, the number commonly used by news services. That number is calculated from the Labor Department’s survey of employers. The 266,000 is calculated from the department’s household survey. For the year through July, 953,000 jobs have been created, but only 222,000 were full-time – representing just 23% of the total job gains.

This caused a spike of 0.5 percentage points in U6 (considered a truer unemployment picture than what the media reports) to 14.3%. National GDP is up by to 1.7%

The headline job number doesn’t matter – what matters is the Fed’s reaction to the number. Federal Reserve policy is working, but not as much as everyone wants it to. Judging by GDP and wages, it isn’t working to stimulate economic growth. Corporate profits have improved dramatically, but most of America has not felt it in their pocket book. Quantitative easing has kept rates artificially low, which helps keep the interest cost on the record U.S. debt at affordable levels. That said, there is really nothing the Fed has done that has impacted job growth, and that is without question the most important factor in continued economic growth. The good news is that the unemployment rate has improved. But does the consumer believe it has improved?

As has been the case for almost three years, gains in private employment have been partly offset by losses in public employment, especially in state and local governments. Government payrolls continue to fall. Here in Texas, it is estimated we will lose close to 160,000 government jobs because of the sequester, around 99,000 in defense cuts and 60,500 in non-defense spending, and they have fallen about 18,000 a month since June. Over that period the drop in government employment has offset about 13% of the payroll job gains that have occurred in the private sector.

To put it in perspective, if the economy adds about 208,000 jobs per month, which was the average monthly rate for the best year of job creation in the 2000s, then it will take until February 2024—almost eleven years—to close the job gap. Given a more optimistic rate of 321,000 jobs per month, which was the average monthly rate for the best year of job creation in the 1990s, the economy will reach pre-recession employment levels by December 2016—over three and a half years from now. That type of growth would definitely show that the economy is back on a quicker mend.

As stated, the jobs recovery has not been as robust. Rather, it’s been a slow, long haul. The U.S. economy lost nearly 8.8 million jobs between January 2008 and February 2010, but has since gained back only about 6.2 million jobs, still about 2.6 million below pre-recession levels. Meanwhile, the population has grown, and some jobseekers have given up. The percentage of workers staying unemployed an extended period of time is the highest it has been since the Great Depression.

If we look at our large metros nationally, eemployment has rebounded from its low point in 92 of the 100 largest metropolitan areas by the second quarter of 2011 according to BLS, but Of the 100 largest metro areas, 65 saw their unemployment rates decline during the first quarter 2013, versus 35 in which the rate rose. Forty-two (42) metro areas experienced unemployment rate declines during each of the last four quarters. In no large metro area, however, was the unemployment rate in the first quarter of 2013 below its pre-recession low, and rates remain above 6 percent in all but 16 large metro areas. Only four cities nationally made a complete jobs recovery: El Paso, Houston, Austin, and San Antonio.

Texas is recovering more quickly for several reasons. First, the region lost a smaller portion of its employment during the recession. When the recovery began, Texas had less ground to make up. Second, Texas’ core industries – oil, gas and technology – are booming again. Employment in oil and gas extraction passed its pre-recession peak in June 2010. Nearly all the jobs lost in equipment manufacturing have been recovered. 100% have been recouped in oilfield services. And third, the region continues to draw residents from other states—some with jobs, some looking for jobs and others looking to start businesses here. Texas’s job growth and population growth is driving the demand for consumer goods and services, creating jobs and opportunities along the way.

Another indicator that the state’s economy has been comparatively healthy comes from the U.S. Census Bureau 2010 report that Texas added more people (nearly 4.3 million) than any other state between the census counts of 2000 and 2010. If Texas’ population base weren’t growing, the region wouldn’t be generating jobs in health care, personal services, retail trade, accommodation, food services, and educational services. A growing population translates into an expanding consumer market. Those transplanted workers are spending their paychecks in local stores, restaurants, theatres and housing communities.

What’s drawing people to Texas? Not any one factor. If one lives in an expensive metro such as New York, Los Angeles or San Francisco, the region’s low cost of living, especially moderately priced housing, may be the draw. If one lives in an area with harsh winters, such as Chicago or Pittsburgh, the region’s mild climate may be the draw. If one lives in a city with limited job opportunities, such as Detroit or Buffalo, the region’s growing economy may be the draw. If one lives in a rural area or small metro, Texas’s offering of rural plus cosmopolitan nature may be the draw.

So what are the take-aways of all this?

1) There is not a quick fix for the economy nationally. Texas will be OK and projected to continue to have a healthy economy. And based on projected population growth and job creation will remain in a growth mode for the next 3 to 5 years.

2) Texas continues with strong job and population growth; however everything is tied to the national and international economy. The Texas region cannot continue to have strong growth with the national and global economy in turmoil.

3) Although employment numbers have started recovery in the Texas region; housing, construction and government employment growth still lag behind and are a good 24+ months from recovering presently. As housing and construction continue to turn strong, the Texas market should rebound stronger than the rest of the country because of the pent up demand and continued growth. The Texas unemployment rate has been at or below the national rate for 78 consecutive months.

4) Texas’s growth is in the urban metros with just under 65% of the state’s population in the big four metros. Remember D/FW and Houston would be ranked by themselves as one of the 20 most populous states nationally, (numbers 17 and 19, respectively). Economies in all 4 cities were in the top 20 best performing in the nation.

5) Consumer confidence continues to erode nationally. Pre-recession, the Conference Board index stayed healthy in the 90 range. Today, the U.S. consumer confidence index stays unexpectedly cooled in July as Americans became less optimistic about the outlook for the economy. The U.S. consumer confidence index was 80.3 in July 2013, down 2.2 percent from June 2013, but 22.8 percent higher than one year ago. Analysts median forecast in a Bloomberg business survey called for a gain to 84.7. The gauge reached an almost six-year high of 84.5 in May. Potentially the recent increases in mortgage rates and prices at the gas pump may have restrained consumers’ views on the economy in the next six months. The Texas region’s consumer confidence index was 106.3 in July 2013, up 7.5 percent from June 2013, and 14.8 percent higher than one year ago. So clearly consumers in Texas are more optimistic than the rest of the nation. Which in turn translates to better consumer spending in our state.

6) True job creation and wage improvement at a national level will be paramount in the recovery. It doesn’t take a rocket scientist to understand that. However the continued lack of confidence nationally shown in the economy continues to hold back business expansion. As Ben Bernanke said in the summer of 2011, “Until we see a period of sustained job creation, we cannot consider the recovery to be truly established.”

All this said, Texas sits better positioned than most states as the national economy continues along the bottom. Austin, Houston and San Antonio have a leg up, having turned positive in the last 18 months. All three see stronger real estate and economic absorptions across all channels. D/FW has begun to see improvement the last 180 days, and should begin to be as strong as the other Texas metros shortly.

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!

Recovery or another real estate bubble?

There is a broad consensus that the housing market nationally, regionally and locally has bottomed, and is on its way to recovery. The hanging question is if this housing recovery is real, temporary, or if it could grow into a bubble.

Home ownership is down nationally

In April of this year, the US homeownership rate hit an 18-year low, signaling a shift away from homeownership towards rental housing. The homeownership rate in the United States fell during the first quarter 2013 to 65 percent, plunging to the lowest level since 1995, according to the US Census Bureau. The homeownership rate is now far below the 2005 boom peak of 69%. Homeownership was lowest in the West at 59 percent and highest in the Midwest at 70+ percent. Although Americans are still buying homes, tighter credit conditions and limited inventory are still holding back many homebuyers who are opting to rent. The Great Recession slowed down household formation, but it did not stop it. Remember, people are still graduating from college, getting married, having families, etc., so there still is a need for shelter. Here in Texas, the need for housing is great.

Many investors are seeing this as an opportunity. The consumers’ inability to buy for whatever reason has allowed cash investors to provide shelter. Over the past few years equity REITS such as Blackstone Equity and Colony Capital have invested an estimated $6.5+ billion (just these two groups), scooping up thousands of foreclosed and REO single family homes. The single family rental market was a large portion of the market, even before the housing crash, with 16+ million homes designated as rentals nationally in 2010, according to the US Census. Add on top of that at least five million plus foreclosures, many of which could become investor-owned rentals, and the potential scale is apparent.

These properties are traditionally in distressed markets where the ability to purchase at a significant discount is still available (often a 40+% discount to current construction costs). The opportunity provides a long-term income stream as well as the opportunity for appreciation — which may come slowly at first but will improve along with the greater housing market. Historically, buying in downturns has produced a strong return, from 10+% annually to much higher.

The key to their success will be effectively managing these properties, which are spread out over geographic areas rather than concentrated as they would be in an multifamily or commercial opportunity. These REIT’s are trying to get as close to the multi-family apartment model as possible. While there cannot be one landlord in one location, REIT employees are armed with tablets and laptops, helping communicate current information from the field. From the inspection and construction teams inspecting potential homes for purchase, to the project managers checking in on homes they are rehabilitating, to the agents showing homes to potential renters, to the handy-men answering renter complaints, all the information is transmitted back to the main office from wherever they are.

Other than DFW, the large REIT’s have not been as active in single family in Texas. The inability to buy large numbers of discounted properties due to the limited supply of homes has prevented the large equity groups from making significant plays in Texas. It doesn’t mean it couldn’t happen, this analyst just believes that that opportunity passed a couple of years ago in this state.

Low Inventory

Meanwhile, here in Texas, there is a shortage of existing homes and new homes for sale. Nationally, there were only 1.68 million previously owned properties on the market in March 2013, down from 1.93 million the prior year, according to the National Association of Realtors. That’s the fewest since March 2000. Here in Austin there is only a 2.7 month supply of resales available, 25 percent fewer than April 2012. In San Antonio housing inventory has held steady at 5.2 months since February. Houston is at a 3.4 month supply, a thirteen year low. And in DFW there is currently a 3.3 month supply of homes— the lowest inventory in almost 20 years. In a healthy balanced market, there’s roughly a six month supply. This March, nationally the number had fallen to a 4.7 month supply — a market favorable to sellers. Limited inventory pushes prices up. The median value of an existing home rose 11.8 per cent, the most since November 2005, to $184,300 last month from $164,800 in March 2012. Many listings are seeing multiple offers. Does this indicate a coming real estate bubble? Not quite.

The same, but different

One of the reasons we are hearing murmurs of a bubble are the stories of frenzy – homes in Austin are selling as fast as they are being listed, and those in desirable areas are receiving multiple offers, sometimes above list price. However, this isn’t a speculative bubble. It’s driven by the lowest inventory levels we’ve seen in years. As stated above, nationally, regionally and locally the inventories are low; home inventories are at 1.9+ million units, which is equivalent to about 4.7 months of supply, based on the current sales rates. And inventories keep dwindling on a year-over-year basis with little to limited replacement. Nationally inventories continue to decline, with 135 out of 146 markets tracked by NAR experiencing year-over-year inventory declines, with about 25% of the markets seeing declines of 20% or more. New home construction has been held on a tight leash, with limited speculative construction due to previous lower demand. Considering that, there’s no way we’re getting to six months worth of supply any time soon locally or nationally – not unless home construction activity picks up in a major way. New home construction remains over 65% below the peak, which also flies in the face of any bubble talk.

What about foreclosures?

Yes, they continue to happen, but they have slowed down dramatically from the top of the bust. Foreclosures fell 27% from where they were a year ago, to the lowest level since 2006. Yes, they continue to happen in Texas, but because of demand remain less than 1.5% of all sales. They are basically a non-factor in this region and they have slowed down dramatically nationally.

Values improving

As more buyers bid on fewer properties, prices are being forced up. Home prices are rising even as homeownership drops. Prices in the top twenty cities have risen 9.3 percent in the past year, according to the Case-Shiller Home Price Indices that track home prices in twenty major metropolitan markets.

Inventory will continue to be challenged as long as interest rates remain low. The tight supply isn’t the only factor slowing the housing market. Homebuyers are facing fierce competition because of record low rates. It is hard to argue with purchasing when rates are so low. Who could refuse the Federal Reserve’s cheap credit? So yes, the claim that the housing rebound is closely tied to the Fed’s campaign to lower interest rates is true. The Fed Rate which has pushed down mortgage interest rates to historic lows has made housing an attractive (and affordable) investment. The low interest rates have lured investors of all stripes to buy homes, a large factor in the diminished inventory we discussed.

So, when you couple this scarcity of listings – particularly high-quality ones – with historically low interest rates, what do you get? Competition for properties, of course. It’s the basic economic principles of supply and demand at work. But as we have stated before, we don’t have to fret about this situation leading to another bubble.

First, increasing record low mortgage rates will slowly erode record affordability. Borrowing costs for a 30-year fixed mortgage just hit 3.51%, the highest level in six weeks, yet are still tremendously affordable compared to the boom. As rates creep higher, it should help contain demand and slow purchases. Second, most mortgage applicants now boast FICO scores above 740, over a 100 points higher than during the boom. Yes, the industry wants to improve and increase lending. There is more capital available than ever before at the banks and equity groups, but they are still concerned about down payments and lending standards. Lending standards remain tight. Insisting on higher credit scores ensures that the real estate market doesn’t get (way) ahead of itself again.

To have a bubble of any type, you need speculation and financing. There may be some speculation happening locally, but it isn’t the short term house-flipping type speculation seen in the boom years in CA, FL, etc. Lenders and appraisals continue to be cautious, taking a lot of the wind out of potential bubble concerns. What we are seeing locally is genuine demand, driven by job creation and inmigration, and low supply due to the slowdown in home construction in the last five years. Increasing values are because of need, and not the speculation we saw in the boom. Any speculation is tempered by the large capital needed to be an investor, typically at least 25% down.

High Demand

Whether it is local, regional or national, we have had a record low number of home sales the last five years. Household buying slowed, while household formation did not. With little to no inventory being produced the last five years that demand is finally catching up to us. Austin needs 23,000 to 25,000 to meet demand, San Antonio 18,000 to 22,000. Another way to look at it, is for every two jobs, you historically have one housing start. That hasn’t happened in any of the Texas metros over the last five years. So, we are playing catch up as well as facing future demand, leading to a healthy local and regional markets for a while.

The continued strength of national, regional and local employment will continue to push the demand for housing, whether rental or purchase. There is always a need for ‘shelter’, both new and used.

The bottom line is that we don’t appear to be in another real estate bubble. Not yet, at least. Is the potential there? Always. But again there is a difference between demand and speculation, and what the Texas metros are experiencing is a strong demand, not speculation. So, forget talks of a bubble and continue to look for ways to profit from the current recovery.

Interest rate behavior

We all know that now is the time to buy real estate with interest rates so low. The Federal Reserve has maintained that they will keep rates low until they feel the economy is fully recovered. Even with home prices in our Texas metros near an all time high, there will not a more affordable time to buy.

Will rates go up?
As we have stated before, eventually, yes! In the short term, no. According to most experts and the Federal Reserve, they should stay low through 2013 and possibly longer. There are many factors involved. Also know that over a year ago, in this same forum, I and others felt that mortgage rates would be over 5% by the end of 2012.

Historically this is the longest we have seen rates stay this low. Please understand that the Federal Reserve has kept rates low for a reason. By law, the Federal Reserve’s monetary policy is to achieve maximum employment, stable prices, and moderate long-term interest rates.

voice graph

The Great Recession and the worldwide financial crisis that started in early 2007 and ended late in 2009 has been one of the most intense periods of national and global financial strain since the Great Depression, and it led to a deep and prolonged global economic downturn affecting almost every developed country. Europe and many countries are still struggling with the after effects of the recession.
Thankfully, the Federal Reserve, our central bank, took some extraordinary steps in response to the financial crisis to help stabilize the U.S. economy and financial system. For those of you that don’t remember, these actions included reducing short-term interest rates from the central banks (the money the Fed lends to all member banks) to near zero, in the hopes of reducing longer-term interest rates and to reduce the cost of borrowing to provide support for the U.S. economy. These lower interest rates help consumers and businesses finance new spending and investing that in turn help support the prices of many other assets, such as stocks and houses.

Quantitative easing
To further encourage the economy, the Federal Reserve has purchased large quantities of long-term Treasury securities in a strategy dubbed “quantitative easing”. The overall planned financial effect is to force lenders and equity to put their money into higher risk, higher return investments, rather than bank CDs. Slowly, the economy has begun recovering, but progress towards the stated goal of maximum employment has been slow and the unemployment rate remains high compared to historic norms. The good news is that despite rock-bottom interest rates, inflation has remained low, apart from some temporary variations associated with fluctuations in prices of energy and other commodities. Also the low lending rates have created an opportunity for buyers (consumers and business) to invest in real estate and other goods, improving the national economy.

Understand that historically, mortgage interest rates have been anything but stable: one day they would fall – the next they would rise. The only thing that was certain was that they rarely remain the same for long periods of time. Someone in the market to buy a home would keep a close eye on rates. But just what is it that causes mortgage interest rates to fluctuate so often? There are many factors involved. But I assure you, they have stayed low for an abnormal length of time. It is time for the economy to heal and with that rates will have to rise.

When interest rates change, it is the result of many complex factors. Those who study interest rates find that it is as difficult to forecast future interest rates as it is to forecast the weather. Since interest rates reflect human activity, a long-term forecast is virtually impossible. After a rise or fall in interest rates, analysts may sound confident about what caused the variation – but any truthful economist, banker, or analyst will tell you they can’t predict rates 5-10 years from now.

Some of the factors that help to dictate interest rates are explained below.

Interest rate behavior

By this time we all know that a slowing economy is good news for borrowers, as it means lower interest rates. If the demand for borrowing capital recedes, then so do interest rates. This is because there are more people who are ready to lend (sellers) than people who want to borrow (buyers). This means that buyers can command a lower price, i.e. lower interest rates. When the economy is slowing the demand for credit decreases, and interest rates go down. Now the unusual thing is that demand has picked up over the last 12 months and rates have not increased. This is because of the artificial low interest rate the Federal Reserve has imposed.

A growing economy is bad news for borrowers because it force up interest rates. When there is a greater demand for credit / money, it forces rates up. Interest rates move because of the laws of supply and demand. If the demand for credit (loans) increases, so do interest rates. This is because there are more people who want money (buyers) than there are people willing to lend it, so those lenders can command a better price; ie, higher interest rates. When the economy is expanding there is a higher demand for credit, so interest rates go up.

Interest rates are the price for borrowing money. Interest rates move up and down, reflecting many factors. The most important among these is the supply of funds, availability and parameters for loans from lenders, and the demand from borrowers. In addition, to keep our banks liquid regulators force certain parameters on the lenders which effect how much a consumer has to put down or have in reserve to qualify.

Take the mortgage and lending market for example. In a period when consumers are borrowing money to buy homes, banks and equity need to have the funds available to lend. They get these from their own depositors. The banks will pay 6% interest on certain financial instruments, and then charge 8% interest on a five year mortgage. That is how they make money. If the demand for borrowing is higher than the funds they have available, they then borrow money from other groups by issuing bonds to institutions in the “wholesale market”. This source of funds is always more expensive. When banks and equity have lots of money to lend and the housing market and demand for capital is slow, any borrower financing a house or purchase gets a lower rate, and in a free market, most lenders will be very competitive, keeping rates low.

Realize that money is perfectly liquid and because of that it is converted easily. In particular, when the demand for money rises, so do interest rates – the “price” of borrowing money. There are many economic drivers that can increase demand – rising consumer spending, the belief that costs for buying and selling will increase, the expectation of a stronger dollar in the near future, increased demand for reserves from central banks (both foreign and domestic), and a rise in foreign demand for US goods and investments. With this demand, there is less desire for the lower return on current bonds. With this greater demand for money, the central banks can charge more. So, each of these aspects pushes up the demand for US dollars, while the reverse decreases the demand for dollars. A rising demand for money, with all else constant, will raise interest rates while the opposite is also true. The opposite can also happen during times when the market becomes averse to riskier assets because investors will move into the dollar and U.S. debt in a search for safety. The demand for money, combined with the supply of money determine interest rates. Since currency is the most liquid store of value, its demand demonstrates the demand, or preference, for liquidity.

Low rates will not be permanent. The only group buying treasury bonds is the Federal Reserve. The demand for lending is picking up at most of the major banks according to a national survey of CFOs and loan officers by the Federal Reserve, and most are planning to hire as well as lend in 2013, leading to expansion. More demand on money forces rates to go up. Mortgage and housing is just one component.

For the non-finance majors out there, this happens in the fixed income markets as a whole. In a booming economy, many firms borrow funds to expand their companies, finance inventories, and even acquire other firms. With rates so low, many have held their own capital earnings, rather than invest. The return for earning for many is better than the cost of borrowing. Meanwhile, consumers look to buying cars, houses and other needs and begin to entertain more. This keeps the “demand for capital” at a high level, and interest rates higher than they otherwise might be.

The interest rates charged by banks are influenced heavily by the decisions and actions of the Federal Reserve. The Federal Reserve, known as the “Fed”, can manipulate interest rates by buying and selling bonds in the bond markets. During economic times when the Fed wants to stimulate the market, the Fed buys bonds on the open market and pays for the bonds with cash. If the Fed continues to buy bonds, the market becomes flooded with cash. This excess cash in turn makes money more available for people who want to borrow. The result is interest rates will naturally come down as different lenders compete for a limited pool of borrowers.

The effect of interest rates on consumers is well known. For every 1% rise in rates, consumers can buy 12% less. Values across the country have improved. Here in Texas they are near highs in all of our major metros. So if you don’t buy today, whether it is from increased home values or eventually higher borrowing costs, you will pay more.

As consumer confidence grows people start spending money. What do they buy? Everything under the sun, but consumer goods is the term you will hear most often. People buy cars, computers, and appliances. As demand for products increase, companies can begin to charge more for their products. As companies begin to make more profits it is not long before workers begin asking for more benefits and more money in their paychecks. As companies meet worker demands, the company experiences increased costs and expenses then inflation begins.

In the last sixty years there has not a better time to purchase a home. You will never be able to afford to buy as much house as you can today! Plain and simple. Draw all the charts and graphs you want. The fact still is: Now is the time to buy! If not now, when?

How much discount should you offer on a home purchase?

This is a question that we are asked several times each month. It varies in form a little each time from submarket to submarket, but I am surprised how often it’s asked in today’s tight housing market.

If you have not been reading this newsletter, than you may not be aware that the supply of lots and homes is very tight. Economics 101 – supply and demand. With greater demand and less supply, prices rise. That is what is happening in Austin, Houston, San Antonio or any market that has a better than average unemployment. We’re blessed. So whenever I hear someone ask, “How much discount should I offer on a house?” my first thought is that there is not a magic formula anytime. Educate yourself before you start down this path. This question can really only be answered on a case by case basis. Before we discuss how that works, let’s give the best possible general answer that we can.

According to the Austin Multiple Listing Service (MLS) records, the average discount off list price for all homes sold in the Austin area during the last 12 months is around 2%, According to San Antonio MLS 3% to 4%. Average days on market in Austin around 30 days. Average days on market in San Antonio is 122 days. Exceptions occur on either side and I don’t know that all foreclosure and short sales are included in MLS data. In the last six months, resale, foreclosure, and new home inventory have decreased dramatically. This seems to be true in most commercial and investment real estate in the four Texas metros.

So, should you just offer 96 or 98% off list price by default? Absolutely not! The right way to determine how much to offer on a house is to research the neighborhood for recent sales and then compare the house you are considering to those recent sales. Certain areas of town are doing better than others. If you are looking at foreclosures, they typically happen in clusters, and very seldom in desirable areas.

Keep your expectations real

Establish a realistic price range if you are whether you are selling a home or buying. Realtors can serve as buyer’s agents by doing a Comparative Market Analysis on the home you are looking to buy. Most consumers probably are not an expert on real estate, and two months spent online researching real estate is not a replacement for a good realtor who knows the business, the local market, and the transaction process. If you are buying, start with a mortgage professional. Meeting with an experienced loan officer will help you determine the price range for your search.

Use a real estate professional

Buying or selling a home or investment property is a large proposition and you can bet sellers and buyers want to get the best deal they can as quickly as possible. Even someone like myself that is considered an expert will use a Realtor because they are bringing an objective perspective to the process. Most quality Realtors will have the best information available with respect to market research so they can recommend the best price for your home to sell or buy in the most expedient manner possible. They’ll be able to offer tips on making your real estate more attractive to potential buyers. They’ll show your home for you, field all inquiries as well as handle objections professionally. Most consumers want an expert to present offers to you as they come in with sage advice and data. In essence they remove the burden from you. They’ll often highlight your home to agents in their office and schedule previews with groups of agents from other offices. In short, they’ll be able to provide a lot of qualified leads or opportunities that you might not know how to find.

With the internet and all those real estate sites, do you really need a Realtor?

Yes. Those sites have disclaimers for inaccuracies in their data. I would not want to base a major financial decision off of faulty data. If asked why I insist on a Realtor, it’s because to get the property sold in a timely and judicious manner to a larger market than I could ever hope to reach. The Realtor may have access to additional information in the market that is not available to the public. My doctor tells me not to self diagnose of self treat. I would consider most good brokers in the same light.

Peers and family are not the best source for real estate advice. To get the best, you need to pay for it, and they need to have access to the latest education, technology, information and training. Buying a home is no different. You get what you pay for. I have used a real estate broker or lawyer on every transaction I have been involved in.

When a buyer has formed a list of potential purchases, the homes will fall in to three categories:

Category #1: The home is overpriced

Every prospective buyer thinks this is true, but it’s not. Unfortunately we run into this often enough to discuss. The seller paid a certain price, financed 100% of the purchase, got a home equity loan for another 10%, and has only paid on a thirty year loan for about three years. This is a problem, especially if the buyers don’t have or aren’t willing to bring any cash to the closing table. If you bought a house in the last three years, there is a good chance you need to keep it a while longer before you sell, even with as strong a market as we currently see in the Texas region.

If the seller needs more than market value for their house just to break even, there’s a problem. Their listing real estate agent has not been honest with them regarding the market and that’s where the homework of a great real estate professional helps. I know you’re probably thinking that could never happen. Trust me, it does happen. The only thing to do here is to make an offer, based on recent sales in the neighborhood, let your real estate professional educate the listing agent, and hope you are not the first ones to introduce the seller to the reality that their property is significantly overpriced. The success rate is about 50-50. Don’t fall in love with the real estate and try to stay emotionally detached. Sometimes you run into a seller who either cannot, or will not, sell their home for the current market value. In this category we will need to offer what you can offer and be willing to walk away if the seller is unrealistic.

In the current market in Texas and other ‘supply starved’ markets, there is a chance of having to pay over list price due to the lack of inventory in a desired community. How much? Again, this is where the advice of a seasoned veteran real estate professional is needed. It eventually becomes a desirability competition – the buyer who is willing and able to pay the most will win.

As the market continues to get tighter and tighter (less inventory, continued demand), educate yourself and be willing to honestly assess supply and demand and not worry about ‘getting a deal’, like you thought you could or heard you would. Education is the best negotiating tool.

So should you offer $250,000 for that $350,000 dollar house? How bad is the condition or location of that house? Only on TV and ‘over drinks’ does this ever happen in the Austin market. We seldom see those types of discounts. If we look at historic numbers, those never show up in this market, if at all.

Category #2: The home is priced at market value

This occurs most of the time. Now it becomes a matter of how much you want the home and how much the seller wants it sold at this moment. This is where education, a great Realtor, and negotiating skills play an important role. Without those it is hard to gauge the seller and agent’s motivation. They want the best return for their investment. If the home is in great condition, with a great school district and a great location, we will have to be aware that competition may show up at any time. As well be aware of multiple bids in today’s current market. Speed is important. The proper course of action in this category is to offer what you have ascertained to be market value and negotiate from there based on the seller’s reaction. Sometimes you will pay retail (the seller’s price).

Category #3: The home is priced below market value

This is a best case scenario. This seller wants a quick sale and is making that clear. But be very careful. Many times we end up with multiple bids on homes priced in this category. Multiple bids means the price goes up. Speed really matters here. Now you have a decision to make as a buyer. If this is the home of your dreams and you have been looking for a long time and nothing else comes close, you have to decide if you are willing to risk losing the home by making a low ball offer. If the home is in above average condition and in a great neighborhood, other buyers will recognize this too. In today’s tight market, we can’t tell you how many unfortunate stories we’ve heard like this. After weeks of looking, a buyer finds “the one” they have been seeking. The sellers did their homework and priced it right. But, the buyer insists on a low ball offer that loses them the home. Then the search begins all over again and they have to settle for their second, third or fourth choice.

With this type of opportunity, buyers should make a reasonable offer, perhaps a little less or more than full price in the regional markets based on the advice of your real estate and lending professionals, and keep the negotiations moving along to a contract. It is not about the best deal, but what is best for you and your family.

So how much should you offer on a house in your submarket? It depends. But now is the time to buy with rates, values, and supply as low as they are in Austin, San Antonio, Houston and other Texas cities. If not now, when?

What type of annual return should I be expecting?

First, you are buying a home, shelter, a place to live. The decision needs to be based on your family’s needs – size, features, location, school district, etc. In today’s local markets, most should expect a smooth, consistent 3-5% annual growth rate in housing. There be submarkets that have higher appreciation rates. The national, regional and local markets are still volatile, but in an upward direction. Each local market and submarket has its own dynamics affecting values.

I hope spelling out your options makes more sense now. There are some great opportunities out there these days. And interest rates are low! These conditions will not last forever. If you can’t get the discount you want, you need to understand not only where the market is, but where it is going. After over five years of stability and negotiable prices, it is now a stronger seller’s market. So educate yourself, get qualified, and good luck! Now is the time to buy!

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?

Is there a danger of a housing bubble in Texas?

First, four things have to be available for a housing bubble: tight supply, demand, regulation, and easy financial terms. Statewide, only tight supply and demand are present; only in Austin does regulation come into play. Financing is still a challenge in today’s environment.

What is a bubble? Bubbles have characterized recent economic history, as institutional and other major investors have sought high-return, low-risk investments. These investments have turned into speculative manias that eventually come crashing down. The last decade alone has seen the telecom bubble, the nearly simultaneous dot-com bubble, the housing bubble, and most recently, the oil bubble. Of all of them, the housing bubble seems to be the most significant and far reaching.

On one hand, consumer spending (remember 70%+ of our annual GDP is consumer spending driven) fed by people borrowing against the temporarily increased equity in their homes kept the world economy going after the high-tech and telecom bubbles burst in 2001 through 2006. On the other hand, the eventual deflation of the housing bubble caused far more severe economic problems than the deflation of the telecom and high-tech bubbles would have caused if the housing and financial bubble had not disguised them. A bubble has been defined as ‘trade in high volumes at prices that are considerably at variance with intrinsic values.’ Bubbles are essentially irrational, so they are difficult to describe with a rational economic model. However, the housing bubble can be explained using simple supply-and-demand curves.

Charles Kindleberger’s wrote a classic book called Manias, Panics, and Crashes which describes six stages of a typical bubble. First, a displacement or outside shock to the economy leads to a change in the value of some good. Second, new credit instruments (zero down or non-qualifying loans come to mind) are developed to allow investors to take advantage of that change. This leads to the third stage, a period of euphoria, in which investors come to believe that prices will never fall. This often results in a period of fraud, the fourth stage, in which increasing numbers of people try to take advantage of apparently ever-rising prices. Soon, however, prices do fall, and, in the fifth stage, the market crashes. In the sixth and final stage, government officials try to impose new regulation to prevent such bubbles from taking place in the future.

All of these stages were apparent in the recent housing bubble and ensuing global recession. The key point is that because of easy credit and high speculative demand, consumers were able to speculate with not only their own homes but were driven to speculate on other local real estate, because annual returns were so high (during the boom years, annual state wide appreciation was 40+% or better in the sand states of California, Arizona, Nevada, Florida plus Georgia). The result was an immense price bubble in those states, home to over a quarter of the nations population.

New housing allows accommodation of population growth and replaces both worn out older housing and housing in areas that are being converted to other uses. The price of used housing is set by the cost of new housing. If the price of new housing rises, sellers of existing homes will respond by adjusting their asking prices. Thus, to understand the price of housing, we must focus on the supply and demand curves for new housing. The steepness of those curves—which economists call elasticity—describes the sensitivity of prices to changes in demand or supply. A flat or elastic supply curve, for example means that large changes in demand will lead to only small changes in price. But a steep or inelastic curve means small changes in demand can lead to large changes in price, as we saw in those states that had high real estate speculation.

The demand for housing is inelastic; few Americans are willing to live without a home. The vast majority of Americans, moreover, prefer a single-family home with a yard. The same is true for Californians, Texans, New Yorkers, Canadians, etc. and, likely, the people of most other nations. While people are willing to live in multifamily housing, most Americans see such housing as only temporary until they can afford a single-family home. This suggests that the demand for single-family housing may be even more inelastic than for housing in general. Inelastic demand curves mean that a small change in the supply of new homes can lead to large changes in price. While demand for housing is inelastic, supply can be either elastic or inelastic. The main determinants of the cost of new housing are land, materials, labor, and the time required to construct a house. Although many love to remind people that the supply of land is fixed, it is actually fixed at a high portion of the total equity level.

Supply and demand charts only go so far in explaining bubbles. The housing bubble was exacerbated by money fleeing the post–dotcom bubble stock market and by loose credit. Investors looking for safe places to put their money quickly noted that housing prices were increasing at double- digit rates in California, Florida, Nevada, Arizona and Georgia. At this point, most home sales were driven by speculation rather than the primary need of shelter.

For example, because of the dot-com crash, San Jose lost 17 percent of its jobs between 2001 and 2004. In the same period, office vacancy rates increased from 3 to 30 percent. Yet, between the beginning of 2001 and the end of 2004, home prices increased by more than 20 percent. The rise in prices in the face of declining demand can be attributed to speculation— that is, people buying homes as sources of income rather than for shelter. Exacerbating this was the ease of credit. Not only did this allow many to borrow against the quick appreciation of their homes (sometimes refinancing twice in a year to pull equity out), but even those who were buying for shelter paid more for a house than its fundamental value (as measured by rents). So the sharp rises in price caused people to see housing as a speculative investment and they had the ability to fund that investment easily.

As we discuss speculation, I am reminded of the Warren Buffet quote, “I define a speculator as someone that seeks to buy and sell in order to take advantage of market price fluctuations and doesn’t really understand them. An investor is someone who holds on to securities that provide a good income or capital gain by virtue of them being based on something of real and increasing value. Risk (speculation) comes from not knowing what you’re doing. Consumers did not really understand the dynamics of housing supply and demand. Housing supply should be driven by job growth, not speculation and the ability to see double digit returns.”

Remember this from economics 101, even with a good handle on supply and demand it is hard to predict hard asset price trajectory (more students would go into economics if there was a true science of predicting returns on assets). Moreover, the last seven years should make everyone wary about predicting gold, silver or housing price changes. The housing price volatility of the last six years has been so extreme that it confounds conventional economic explanations. Certainly, those price increases cannot be explained by increases in average income. Income growth was quite modest from 2002 to 2006. Nor can the boom be explained by a dearth of new housing supply. Construction rose dramatically during the boom.

While low interest rates, on their own, cannot influence the real estate bubble, perhaps the increased availability of credit to subprime borrowers has more explanatory power. The correlation between housing price growth and subprime lending across markets is likely to indicate that lenders took more risks in booming markets as that those risks caused markets to boom. The most plausible explanations of the housing bubble require levels of irrationality that are difficult for economists and analysts either to accept or explain.

I don’t think people actually believed that housing prices would never, ever go down before the housing bust. What they thought is that housing prices would go up in real terms, on average, over time – that housing was/is a good long-run investment. They knew there would be variation around that trend, but they expected the variation to be relatively mild, they didn’t expect the severe variation in prices and associated problems that actually occurred. Even those who had been through late 80’s housing bust in Texas and California didn’t expect values to decrease much.

But this still leaves the original question unanswered. Is there any reason to worry about a local or regional ‘housing bubble’?

First, the true need for shelter in all four metros is there. All Texas metros like the rest of the country cut back dramatically on producing housing and any type of real estate investment. Secondly, in the last five years if any of us would have approached lenders or equity about housing, office, or most real estate development they would have kicked us out of their office based on how volatile the market has been. However, the continuing job creation in Texas will fuel demand and continue to put pressure on supply. The challenges of the financial markets (mortgages, banking, Dodd Franks legislation, Enforcement of Basel 3, etc.) will slow the ability to speculate on real estate that we saw in the last few bubbles.

Most Texas metros have seen a healthy appreciation of rents over the last couple of years. This has put more pressure on the consumer feeling the need to buy. The relationship between rent and housing prices depends heavily on borrowing / interest rates – both the real portion and expected inflation. A house is like a utility company. Instead of providing power services, it provides shelter services and keeps you from having to pay rent.

Most financial folk are familiar with the rule-of-thumb that utilities tend to trade like bonds. Higher interest rates lead to lower bond and utility stock prices. Lower interest rates lead to higher bond and utility stock prices. This is because – like a house – you are receiving a fixed stream of services over a long period of time. When the market is balanced the monthly mortgage payment should be slightly higher than the rental payment because 1) Mortgages get a tax break and 2) Traditional rate mortgages offer you the stability of a fixed payment. So most consumers moving to Texas have displayed a great need to buy rather than rent if able. This has caused increased demand regionally.

Job growth has been one of the primary factors for real estate values improving regionally, much more so than in the rest of the country.

If housing price growth merely stabilized into a sustainable equilibrium with rents then the future probably wouldn’t be too dramatic. We would see a shoot-up in home prices, followed by a long period of little to no price growth as the Fed raised interest rates. Rents would still be going up and monthly mortgage payments would rise with them to maintain equilibrium. However, mortgages payments would be rising because interest rates were rising, not because home prices were rising.

Eventually, the Fed will stop raising rates and home prices would start to drift higher and eventually home price growth would converge to rent growth. However, the Fed is holding rates steady. Should that cause concern about a ‘bubble’? In the near future – the next three to five years – no. Lending is not getting looser. The potential for a local housing bubble will be greater if that happens.

Sometime in the future it is very likely that credit standards for homebuyers will fall. This will allow homebuyers to make larger offers and it will allow young people to buy a home even when they lack a down payment. This rapid increase in the number of buyers and their purchasing power will likely drive home prices into a bubble – likely not as large as in 2005, but it’s not out of the question that the potential for a bubble is there eventually.

We might think – “Didn’t lenders learn their lesson?” Or perhaps, “See, this is what happens when we create a moral hazard.” Neither of these are really correct. A perfectly competitive market in lending could not help but go into a bubble. To the extent our lenders avoid it, it is because regulations and/or tacit collusion among major players prevents the competitive equilibrium from being reached. As standards go down, buyers rush in with more buying power and we enter a new bubble phase. To my knowledge of history neither the government, the lending industry, nor we as a society have done anything that promises to prevent this.

But back to the question, are we in a housing bubble in our region? With current demand, job growth, and more demanding lending standards the potential is there, but not near as much as the run up in 2004 through 2006. Supply and demand will continue to be your governing factors and presently they seem to show favorable strength of the Texas regional market for a while – not parameters for a bubble currently.

This has been the fourth major recession I’ve experienced, and the harshest. I am not one known for optimism. With that in mind, believe me when I say our metro markets look good for a while. Whether you decide to participate or not is you and your financial advisor’s decision. If not now, when?