Texas grows while nation lags

We live in confusing economic times. Here in Texas, it is apparent that the recession is over and the economy is recovering. Most regional economic indicators have been positive for a while. The national picture is not as clear, as the media is fond of pointing out. Let’s look at the facts.

Whether you live in Austin, San Antonio, Houston, or DFW, in Texas, the economy seems to be on the upswing. Evidence can probably be found on the street where you live; it’s the “sold” sign planted in the neighbor’s yard. It’s the lack of rentals available. It’s low unemployment. If that wasn’t enough there is all the evidence that rents and employment will continue to increase in most of our Texas metros as more people move to Texas.

Elsewhere, many are not happy with the speed of the recovery. Nationally most talk about the lack of momentum. Let’s look at the national economic indicators and compare to the regional.
After such a visible economic change in 2013, so far this year most housing metrics outside of Texas seem to have disappointed expectations. Though the severe winter throughout much of North America has restrained some housing activity, nonetheless, there is an absence of underlying consumer momentum this spring, perhaps due to buyer sensitivity (sticker shock) to home prices and finance rates and the slowing of job growth at year end.

In the years since the Great Recession ended, millions of Americans who have gone without jobs or raises have found themselves wondering something about the economic recovery: is this as good as it gets? Nationally, it increasingly looks that way.

Three straight weak job reports have raised doubts about economists’ predictions of breakout growth in 2014. Just 113,000 jobs were added in January. In December, employers had added a puny 75,000. Job creation for the past two months is roughly half its average for the past two years. February’s lack of movement off of 6.7% unemployment is disappointing nationally, and further dims hopes for a breakout year.

Many point to the global economy showing signs of slowing. Global manufacturing has slumped. Fewer people are signing contracts to buy homes. Global markets have sunk as anxiety has gripped developing nations.

Only a few weeks ago, at least the short-term view looked brighter. Entering 2014, many economists predicted growth would top 3 percent for the first time since 2005. That pace would bring the U.S. economy near its average post-World War II annual growth rate. Some of the expected improvement would come from the government exerting less drag on the economy this year after slashing spending and raising taxes in 2013.

In addition, steady job gains dating back to 2010 should unleash more consumer spending. Each of the 7.8 million jobs that have been added provided income to someone who previously had little or none. And since 70%+ of the economy flows from consumers, their increased spending would be expected to drive stronger hiring and growth.

Growth of real gross domestic product (GDP) slowed in the first quarter to a disappointing .1%, following an average gain of 3.1% in the prior three quarters. The loss of business momentum in the early months of the year is attributed to poor weather conditions, but there may be more to that than what is seen at first glance.

Texas vs. everyone else

Nationally, a rebound in auto sales, an improved factory sector survey, and a pickup in hiring during March confirmed that weather played a role in holding back growth, and a turnaround in economic activity is highly likely later in the year. Overall economic fundamentals remain supportive of 3.0% economic growth during the rest of the year.

Here in Texas, vehicle sales are approaching pre-recession records. The Dallas Federal Reserve report on manufacturing shows optimism and continued improvement, a bit stronger than what is happening nationally.

One of the telling signs of the strength of our national economy is consumer confidence. A healthy attitude about the economy is typically somewhere above 90. The U.S. consumer confidence index was 82.3 in March 2014, up 5.1 percent from February 2014, and 33.0 percent higher than one year ago.

In comparison the Texas region’s consumer confidence index was a healthy 109.2 in March 2014, down 2.8 percent from February 2014, but 21.2 percent higher than one year ago.

Sales and construction of homes are sending mixed signals. Nationally, the January-February average of new home sales was flat compared with the fourth quarter performance. Regionally and locally residential markets continued to be strong in all Texas metros, with stories of multiple offers on most sales. Nationally, sales of existing homes have been trending down since August 2013, which is not true locally. Construction of new homes slipped in the early part of the year, partly due to bad weather. Locally and regionally builders cannot keep up with demand. The Mortgage Purchase Index of the Mortgage Bankers Association recovered in March after a drop in February, implying that an increase in homes sales is around the corner. Most analysts, economists, as well as the Fed are watching the housing market closely to ascertain if there is more than weather at play.

Business inventories remain a wild card after a consistent accumulation for the first three quarters of 2013 nationally. Regionally, the Dallas Federal Reserve showed the continued strength of Texas output and inventories. The January-February inventories data do not point to a large decline in the first quarter; the timing of a correction after a big buildup of inventories is always a challenge to predict.

In March, the national unemployment rate (6.7%) held steady despite an increase in hiring because the participation rate moved up, a positive development. But again, private sector payroll employment exceeds the peak seen in 2007. The latest labor market turnover report shows that the number of job openings in February was the highest level since January 2008. The strengthening of labor market conditions allows the Fed to complete the reduction in asset purchases by October 2014.

One of the major factors of the economy not gaining traction is shown in the BLS chart below. Private industry is hiring, but nationally the hiring has been primarily in the lower paying jobs. While government jobs have not gotten back to prerecession numbers, nationally the jobs created have not filled the jobs lost.

voice graph 5-2

Texas unemployment continues to shine with the state’s unemployment at 5.5%, Austin at 4.5%, San Antonio 5.2%, Houston 5.2%, and Dallas / Fort Worth at 5.6%. More importantly, job creation has been positive across almost all income levels.

Searching for 3% growth

In looking at economic growth, most analysts look at a dividing line between a slow-growth economy that is not satisfactory and above-trend growth with a tide strong enough to lift all and put people back to work. That number is 3 percent. The recovery had appeared to achieve a breakthrough in the final quarter of 2013. The economy grew at an annual pace of 3.2 percent last quarter. Leading the upswing was a 3.3 percent surge in the rate of consumer spending, which had been slack for much of the recovery partly because of high debt loads and stagnant pay. Then the first quarter of 2014 showed dramatic slowing of the national economy. Which is it? We will have to wait and hope for the best.

Most economists are looking for the national economy to expand 2.7 percent in 2017 before declining to an average of 2.2 percent through 2024. That’s about as sluggish as the current recovery has been, on average, so far. Regionally and locally the expectations are above 3% sustained through 2020. A sign of the major difference in the regional economy vs. national.

An economy that grows faster than 3 percent would make it easier for the 3.6 million other Americans who have gone without a job for more than six months to find work. The weakness of the recovery stems in part from the usual lingering hangover from financial crises. Historically, research shows that it takes a decade plus to fully heal and achieve previous highs in growth and production. Remember no financial crisis has seen immediate reversal. It takes time. The good news is that financial crises do not last forever. A decade is a long time. But a long time is not the same as forever.

That may not match how people in Texas or a handful of big, prosperous cities see things. After a disastrous and historic crash, housing is booming in places like San Francisco and New York. Bidding wars are back, and the question is not whether the real estate market is recovering but whether new bubbles are forming or is the market just playing catch up.

Except in a few booming markets, residential and commercial construction are nowhere close to pulling their traditional economic weight. Consider this: investment in residential property remains a smaller share of the overall economy than at any time since World War II, contributing less to growth than it did even in previous steep downturns in the early 1980s, when mortgage rates hit 20 percent, or the early 1990s, when hundreds of mortgage lenders failed.

If building activity returned merely to its postwar average proportion of the economy, growth would jump this year to a booming, 1990s-like level of 4 percent, from today’s mediocre 2-plus percent. The additional building, renovating, and selling of homes would add about 1.5 million jobs and knock about a percentage point off the unemployment rate, now (6.7%). That activity would close nearly 40 percent of the gap between America’s current weak economic state and full economic health.

Slow construction is holding the economy back

As we all know some areas of the country were way overbuilt, and in those markets buyers are still working through those supplies. Bank lending is only now easing for homebuilders, developers, and buyers. Here in Texas, even thought we had the demand, construction and acquisition equity is just beginning to become active. Locally and nationally those restraining factors have eased a lot in the last few years. The bigger thing holding back housing is simply household formation and demand. Many people are delaying the need to fulfill the American dream of buying a house of their own.

It may yet prove to be temporary, but for now at least, millions more people are doubling up with roommates, living at home with parents, and otherwise finding ways to avoid doing the one thing that would get the housing economy back to normal: buying a home.

The number of new houses and apartments that are needed in the United States is determined over the long term largely by demographics — immigrants arriving and young people moving away from home. From 2000 to 2007, the number of households rose 1.24 million a year on average — about what economists would expect, given those demographic trends.

Add in the 300,000 or so homes that fall into disrepair each year and need to be replaced, and builders would have to construct around 1.5 million homes a year to keep up with long-term demand.
During the boom, builders were much busier than that, putting up 2.1 million more houses from 2000 to 2006 than if they had stuck to that 1.5 million trend rate.

But the correction underway since the housing bubble burst has been far more severe than the overbuilding that preceded it. From 2007 to 2013, builders constructed 4.8 million fewer homes than they would have had they kept to the trend rate. In fact, if the challenge was solely to work through the 2.1 million “extra” homes created during the boom, that concern should have been finished around the middle of 2010. A couple of things happened. Many of those homes were built speculatively for builders as well as buyers. in hindsight the market got ahead of itself in many markets namely, Nevada, California, Arizona, and Florida. 55% of foreclosures happened in 32 counties with in these states.

In my eyes this market will correct itself in time. History and demographics have shown that.

The good news is that looking at household formation on a local basis, the Texas metro markets cannot keep up with demand. All local markets are seeing strong value improvement as well as more people moving here than current housing inventory can give shelter to.

Based on the slow economic performance nationally in the first quarter of 2014, what will shape the housing market through the rest of 2014-15 locally?
• Not enough residential, commercial, office or retail space available. The lack of building and financing over the last six years has allowed rent and owner values to improve. Presently most local brokers, realtors, and builders will tell you of the need for inventory.

• 2014 transaction volume should increase modestly. Housing metrics should improve in 2014 due to faster economic growth, and continued job growth, despite somewhat higher interest rates, as well as more measured home price inflation. Single-family starts are projected to improve 10 to 15% to around 10,000 homes in Austin and San Antonio. Multifamily starts should slow as the market decides whether it is at a tipping point on apartments. Austin has over 36,000 under construction or in the pipeline, yet there has been little drop in occupancy and concessions on rentals are nonexistent, but bear watching. San Antonio has been a tad slower but still quite a few new apartment starts with over 10,000 this year. Both rental markets bear some watching.

Resales will bear watching because of the lack of inventory in all metros. Those sellers that are looking to sell, historically want to stay in Texas according to Gallup polls and historical data so resale inventory will have pressure on it due to immigrants into the state as well as those who live here presently.

• The attractive home, land, investment prices in our regional markets, low absolute mortgage rates, and a moderate rise in nominal incomes have driven improved affordability and valuations. Mortgage rates remain well below their historic averages, and housing pricing remains undervalued versus incomes.

• The local demand continues to be effected by narrowing of affordability, diminished but persistent lack of inventory, challenging mortgage-qualification standards and lot shortages. As noted in the past, the recovery will likely remain challenging.