The Texas Housing Market

 The Texas Housing Market

Austin

By Chris Heller

Every month, a big event – South by Southwest, the Austin City Limits Music Festival, Formula 1 – attracts visitors to Austin from around the world. They take in the scene and decide they’re ready to move. Their first challenge is finding a place to live. Their second challenge is finding a place they can afford.

Austin continues to experience strong economic growth as start-ups and established businesses seek opportunities among Austin’s creative, highly educated workforce. The booming economy is supercharging the area’s housing market, keeping inventory low and prices high.

Inventory

While 2014 represented another solid year for the city’s overall housing market, there are signs that the overheated growth of the previous year has started to level off. Home sales increased a modest 1.6 percent in 2014, with just over 30,000 homes selling.

The biggest constraint on the Austin housing market is the supply of homes – home listings increased only 3.3 percent despite significant demand. Months supply – a measure of the number of months it would take for all of the homes on the market to sell at the current pace of home sales – averaged only 2.5 months. Economists generally consider a market to be balanced when there is 6 months of inventory.

Austin is experiencing an extreme version of a sellers’ market, where sellers have the upper hand and buyers compete in bidding wars.

Affordability

With more people wanting to buy homes than there are homes to buy, prices are rising. In a balanced market, economists would expect year-over-year price increases in the range of 4 to 6 percent. Last year, Austin’s median home price increased 8.1 percent to more than $240,000.

While this might seem an attractive scenario if you’re a home seller, it has serious implications for affordability, especially downtown. Companies are increasingly relocating to thefrom out of state to Austin’s vibrant city center, where people want to live, work and play. Cranes dot the skyline with new residential projects, almost all of which are priced at the upper end of the market. Austin is similarly seeing a boom in hotel construction, with multiple 1,000-room hotel projects rising to meet event and convention demand. These hotels will employ a lot of people, which is a boon for the local economy. But these workers are unlikely to be able to live near their work. Austin’s affordability index – the ratio of median family income to the income required to qualify for a mortgage for a median priced home – continues to trail other major metropolitan areas in Texas. In other words, Austin is less affordable than Dallas or Houston and it’s becoming less and less affordable each year.

Employment

The good news? The Austin market is being driven by consistent economic growth and job stability. With unemployment now below 4 percent, the metro area population continues to expand as companies work to recruit skilled workers. This is boosting incomes and consumers’ ability to purchase homes. Inc. magazine recently named Austin one of the top cities for fast-growing companies.In 2014, Austin locked down the No. 1 spot on Forbes’ list of America’s fastest-growing cities. Commercial real estate is thriving and builders are working hard to meet demand.

Construction

In 2014, permitting for single-family construction hit its highest level since 2007. Permits increased 30 percent to more than 11,000 units. Multifamily permitting is also strong, though it appears to have peaked in 2013, dropping 21 percent in 2014 and falling behind single-family permits, the pattern that has been the historical norm.

More homes will appear on the market in 2015. Yet despite this much-needed increase in inventory and an expected increase in months supply, demand for homes, condominiums and duplexes will stay high.

 First-time Homebuyers

The health of any housing market is tied to the actions and purchasing power of first-time homebuyers. In Austin, homes priced under $160,000 made up about a third of the market in 2012. Today, it’s less than one-fifth. For low-income Austin residents, the dream of homeownership is challenging and could become even more challenging with tighter lending standards. Moreover, centrally located real estate is at a premium, driving up prices in communities that have historically been home to residents with lower incomes.

Student Loans

Austin, of course, is home to the University of Texas, which each year produces thousands of graduates looking for opportunities to stay in the town they love. A significant development over the past decade has been an increase in student debt. As a percentage of consumer debt, student debt has risen sharply. This has big implications for the housing market. Increasing student debt affects the price point at which first-time homebuyers qualify for mortgages. It can also cause individuals and couples with a lot of student loan debt to delay when they buy their first home and affect the number of homes they buy and sell during their lives.

Other Factors

Austin has rightly earned its reputation as an energetic, dynamic city. The caveats to continued growth in the Austin market are rising interest rates and the health of the larger economy. While Austin’s economy centers on the technology and professional services industries and is relatively insulated from swings in energy prices compared with other Texas cities, it is increasingly interconnected with global businesses and economic conditions.

Austin, with its live music, food trucks and trendsetters, is a city that seemingly knows no limits. The Austin housing market is putting that theory to the test. Now is the time for business leaders to work together to ensure Austin’s legacy as an attractive and affordable place to work.

Chris Heller is CEO of Keller Williams. The Texas-based company is the world’s largest real estate franchise by agent count. In 2015, Training magazine named Keller Williams the No. 1 training organization in the world.

SAN ANTONIO

By Luis B. Torres, Ph.D.

The San Antonio housing market gained momentum as inventories fell and home sales rose (Figure 1). This put upward pressure on single-family housing prices. Single-family housing construction increased slowly compared with housing demand. Among the constraints were limited lots, labor shortages and wage pressures. San Antonio single-family construction, as measured by housing permits, is still below 2008 pre-crisis levels. San Antonio home inventories have been less than 6.5 months since third quarter 2012 when they fell to historical lows and caused a steady increase in home prices. San Antonio home prices have increased more rapidly than in the United States, but they remain below the Texas average. San Antonio homes continue to be more affordable than the nation.Microsoft Word - San Antonio Housing Market 2015.docx

Picked-up Housing Demand

The San Antonio economy continues to grow, causing moderate job gains and the unemployment rate to register historic lows below 4 percent. Unemployment declined to 3.8 percent in February 2015. Employment growth has been broad-based with construction and mining leading the way and the manufacturing industry registering year-over-year continuous declines since September 2014. Mining employment is expected to decline in 2015 because of the fall in oil prices to below $50 dollars a barrel. Other industries, like wholesale trade, professional business services, and transportation, warehousing and utilities, have expanded strongly. San Antonio’s expansion is putting upward pressure on total wages, but private wages have remained flat at around $21 per hour. When discounted by inflation, real hourly wages declined.

An expanding San Antonio economy reinforced housing demand, causing home sales to increase annually and reach 13.3 percent in February 2015. After losing momentum in the middle of 2014, home sales accelerated in fourth quarter 2014 and raised overall home sales for San Antonio to a level not seen since 2006.

Housing Supply Limitations

Even with the increase in housing demand, homebuilding activity in San Antonio, measured by single-family permits issued, is still below its precession peak and early 2000s levels. The number of building permits hit 1,535 in December 2005, almost three times the 487 building permits registered in February 2015. A low supply of developed lots, tight credit for land development, increasing land prices and material costs, as well as labor shortages, have constrained the supply of new homes.

The tight lot supply and rising builders’ costs have restricted the types of single-family housing built, and this caused developers and builders to shift from entry-level houses to higher-priced houses. Expensive building materials and labor costs incentivize builders to build bigger and more expensive houses.

Falling Inventories and Rising Prices

Since third quarter 2012, supply limitations and increased demand have caused San Antonio housing inventories to shrink below the 6.5-month threshold, considered a balanced housing market. The historic low of 3.7 months was recorded in February 2015.

The steady fall in inventories has caused home prices to increase rapidly, outpacing the nation’s overall annual rate of 4.9 percent in fourth quarter 2014 versus 5.5 percent in San Antonio measured by the Federal Housing Finance Agency (FHFA) house price index. The Multiple Listing Service (MLS) reported average and median sales prices of $218,600 and $184,700, respectively, in February 2015 compared with $201,000 and $168,600, respectively, in February 2014.

Housing Affordability Declines Somewhat

Rising home prices in San Antonio have reduced housing affordability in the past three years. The affordability index estimated by the Real Estate Center at Texas A&M University, reached its highest value in fourth quarter 2011 at 2.6. It dropped consistently through 2014 and then flattened out to 1.7. A ratio of exactly 1.0 indicates that the median family income is exactly equal to the income a conventional lender would require for the family to purchase the median-priced house. Thus, a ratio greater than 1.0 indicates that a median-income family earns more than enough to buy the median-priced house. In other words, the family could afford to buy a house priced above the median price.

In addition, family income grew at a relatively slower rate after the financial crisis. Still, home affordability is somewhat above pre-crisis levels given the impact of historical low interest rates. The index after second quarter 2014 seems to have changed its falling trend. The San Antonio affordability index indicates that home ownership regionally remains very affordable.

But new home buyers have felt the pinch, given the low supply of smaller and lower-price houses. Faced with rising prices and credit access constraints, fewer new homebuyers entered the market.

Multifamily Growing

Multifamily construction, measured by building permits, slowed considerably in the second half of 2014 and continued to fall in February 2015 (Figure 2). In the same manner of single-family permits, the number of multifamily permits in San Antonio is still below pre-crisis levels. This is in sharp contrast to Texas multifamily permits that surpassed prerecession levels by end of 2013. San Antonio has not seen the migration from other parts of the nation like Austin or Houston.Microsoft Word - San Antonio Housing Market 2015.docx

The average occupancy rate was above 90 percent in last quarter 2014, and the price per square foot of rent was about 97 cents, continuing the positive trend after falling in the first half of 2010 (Figure 3). The high occupancy rate and rising rent prices reflect the regional economic and population growth. Supply limitations for new single-family housing caused an increase in demand for multifamily housing.

Microsoft Word - San Antonio Housing Market 2015[1].docx

Outlook: Tempered Growth

Low inventories, combined with a growing San Antonio economy, have stimulated demand for housing. However, limited lots, labor shortages, wage pressures and tight lending conditions have impeded new home construction. Insufficient supply is resulting in rapid home-price appreciation. There are additional headwinds facing the San Antonio housing market, like the negative impact of low oil prices on the Texas economy and rising interest rates, as the Federal Reserve starts to raise its benchmark rate. All of these factors would definitely temper the growth prospects for the housing market in 2015. In contrast, improved access to credit improves to both developers and buyers, especially first-time buyers, in an atmosphere of strong U.S. economic growth, could lead to a more dynamic housing market in San Antonio and could possibly eliminate some of the headwinds that are moderating housing market growth.

Dr. Luis B. Torres is a research economist with the Real Estate Center at Texas A&M University. Formerly with Mexico’s central bank, Banco de Mexico, Luis has expertise in monetary policy after serving four internships at the El Paso office of the Federal Reserve Bank of Dallas.

Houston

By Jim Talbot

Houston is one of the most diversified metropolitan areas in the United States – both demographically and economically. Despite doom and gloom predictions about increased volatility in the energy sector, Houston’s housing market is strongly positioned to continue growing.

Home Sales

More homes sell in Houston than in any other Texas city. In 2014, roughly 80,000 homes sold, a number constrained only by the limited number of houses for sale. Inventory levels (that is, the time it would take for all listed properties on the market to sell) averaged just 2.8 months of supply – well below what’s typically considered a “balanced market.” (A market is balanced when there’s 6 months of inventory. Less inventory indicates a “seller’s market.” More inventory means a “buyer’s market.”) It was the lowest level Houston had seen in the past quarter century. Houston’s distressed property market, which had spread during the years following the 2008 downturn, has receded more quickly than many analysts expected, meaning a growing percentage of Houston’s residential transactions are traditional home sales.

Home Prices

Tight inventory and continued strong demand contributed to another year of double-digit10-percent median home price increases. The price of oil may have dropped, but the price of houses keeps rising.

Despite the hot local real estate market and limited inventory of houses, Houston remains more affordable than Dallas, San Antonio and Austin. (The median family income in Houston is approximately 1.8 times the amount required to qualify for a mortgage on a median-priced home with a 20 percent down payment.) Like other Texas cities, Houston has become less affordable each of the past several years, meaning it requires a larger percentage of one’s income to live in comparable housing.

Interest Rates

Low interest rates have been a major contributor to Houston’s robust home sales. Rising interest rates could slow sales. However, it seems increasingly unlikely that the Federal Reserve will raise rates significantly in the near term. Interest rates – and, by extension, mortgage rates – will remain far below historical averages. If and when the Fed starts increasing rates, home sale growth may slow. Until then, Houston should continue to see a lot of home sale activity.

Job Growth

Houston’s workforce has grown significantly in recent years. In 2014, Houston added more than 100,000 jobs across a variety of economic sectors, lowering the unemployment rate to 4.1 percent by the end of the year. Rapid declines in oil prices likely mean that the pace of job growth will be tempered. However, Houston’s economy is large enough and diversified enough that other sectors of the local economy will continue to prosper.

Relocation

The combination of positive economic conditions and a welcoming business environment have made Houston a very attractive market for relocation. Big companies are betting big – like ExxonMobil’s new campus in The Woodlands. Small businesses see big opportunities too. While the fall in energy prices seems unlikely to derail large relocation projects like ExxonMobil, planned expansions may be delayed or scaled back. This could adversely affect Houston’s commercial real estate market, which has been building at feverish pace in recent years to meet rising demand. Similarly, cuts to high-paying energy jobs may depress demand for luxury homes, which have been booming for several years.

While the fundamentals of the Houston economy are strong, uncertainty in the energy sector is the element most likely to disrupt Houston’s housing market this year. A number of oil companies and energy-related businesses have announced layoffs. This could spur housing activity as newly unemployed workers sell or look for new homes. Subleasing of residential and commercial properties could also expand.

International Sales

A potential growth area for Houston is international sales. With one of the most culturally diverse populations in the United States, Houston is an attractive market for international buyers and sellers. Should price increases slow or global economic events make U.S. investments more attractive, Houston could experience an uptick in sale of assets to foreign buyers.

Construction

Houston homebuilders continue to put up a lot of houses. Last year, single-family home permits in the Houston area increased 11 percent year-over-year to more than 38,000. Multifamily permits increased at an even faster rate – up 50 percent to 25,000 units. As Houston’s net domestic migration (that is, the number of people moving into the city minus the number of people moving out) has continued to grow, exceeding 55,000 in 2013, demand for housing continues to be a driving factor in Houston and its surrounding communities.

Houston is America’s energy capital. As such, it’s likely to feel the pinch of lower oil prices more than any major city. That said, Houston’s economy is far more diversified today than it was 10, 20 or 30 years ago. And it’s much more resilient than its boom-and-bust reputation might suggest. Houston’s housing market will likely continue to grow, perhaps not as rapidly as it has in recent years, but more than enough to sustain economic growth that will position Houston well for the long term.

Jim Talbot is COO of Keller Williams. The Texas-based company is the world’s largest real estate franchise by agent count. In 2015, Training magazine named Keller Williams the No. 1 training organization in the world.

Dallas-Fort Worth

by Dr. Luis B. Torres

Demand for homes in the Dallas-Fort Worth (DFW) housing market has outpaced the supply, causing inventories to fall to historical low levels (Figure 1) and house listings to decline. This has curbed home sales and led to strong price increases for single-family homes.

Microsoft Word - DFW Housing Market 2015.docx

As observed in other parts of the state, single-family housing construction has not kept up with demand. DFW home builders faced constraints such as tight credit for land development, limited developed lots, increasing land costs, labor shortages and wage pressures. Single-family housing permits in DFW, a measure of home building activity, have outpaced Texas and the nation since 2014, but still are below 2008 pre-crisis levels. DFW home inventories have been less than 6.5 months since third quarter 2011 and have caused a steady increase in home prices, outpacing the country’s home price gains.

Home prices increases in Dallas and Fort Worth have not been homogeneous. Dallas home prices have grown at a higher rate than the state while as a whole Fort Worth increases have been below the Texas average. DFW homes continue to be more affordable than the nation’s, especially Fort Worth single-family housing, which is more affordable than the state and Dallas.

Housing Demand Grows

The DFW economy continues to expand, benefiting from the growth in the U.S. economy. Historically the DFW economy has had a stronger relationship to the performance of the nation’s economy rather than to the energy sector. This is a major reason it registered growth rates below the ones observed in the Houston economy when oil prices were above $100 a barrel and the growth of the nation’s economy was sluggish. DFW employment has grown at a higher rate than the state and the nation, causing the unemployment rate to drop to historical low levels, around 4 percent for both the Dallas and Fort Worth areas. Employment growth has been broad-based with information services, leisure and hospitality, and construction and mining leading the way. DFW employment growth is putting upward pressure on wages, raising private hourly earnings to $27.60 in Dallas and to $25.55 in Fort Worth, increasing annually in real terms on average for the first two months of 2015 ― 6.2 percent and 1.9 percent, respectively.

A thriving DFW economy strengthened housing demand but was constrained by falling home listings for sale, declining annually in February 2015 by 17.7 percent. Harsh winter conditions in DFW had a strong negative effect on housing demand. Both factors caused home sales to register 0 percent annual growth in February 2015.

Home Building Tries to Keep Up with Demand

Single-family permits issued in DFW increased to 2,405 in February 2015, an annual increase of 30.3 percent, as home-building construction tried to keep up with housing demand. The last time the number of permits issued in a month was above the 2,000s was October 2007. The same supply constraints observed in other major metropolitan areas are present in DFW, such as a low supply of developed lots, tight credit for land development, increasing land prices and material costs, and labor shortages.

The building of affordable housing has been affected negatively by the supply limitations since it has incentivized builders to build bigger and more expensive houses to absorb the land development cost as well as the material and labor costs to maintain positive profit margins. This is hurting the first-time homebuyer.

Bottom Level Inventories and Accelerating Prices

DFW housing inventories have been below the 6.5-month threshold, considered a balanced housing market, since third quarter 2011, caused by supply limitations and increased demand. Every month since August 2014 a historical low has been recorded, falling to two months in February 2015.

The continuous fall in inventories has caused home prices to increase rapidly, especially in the Dallas area. They increased 7.2 percent in fourth quarter 2014, exceeding the nation’s rate of 4.9 and the state of Texas’ of 6.4 percent measured by the Federal Housing Finance Agency (FHFA) house price index. In Fort Worth home prices registered an annual increase of 5 percent in fourth quarter 2014.

This pattern is also reflected in the Case-Shiller price index, in which Dallas registered an annual increase of 8 percent versus 4.5 for the United States in January 2015. The Case-Shiller price index is a better relative indicator of bigger and more expensive houses. The Multiple Listing Service (MLS) reported average and median sales prices for Dallas of $277,900 and $215,700, respectively, in February 2015 compared with $255,600 and $194,600, respectively, in February 2014. In Fort Worth the MLS reported average and median sales of $194,900 and $155,400, respectively, in February 2015 compared with $161,700 and $131,300, respectively, in February 2014.

Housing Affordability Declines Somewhat

Housing affordability in DFW has fallen since 2011, a consequence of rising home prices. The affordability index estimated by the Real Estate Center at Texas A&M University reached its highest value in fourth quarter 2011 at 2.8 for Dallas and 3.9 for Fort Worth. In fourth quarter 2014 it reached a value of 1.8 for Dallas and 2.4 for Fort Worth. A ratio of exactly 1.0 indicates that the median family income is exactly equal to the income a conventional lender would require for the family to purchase the median-priced house. Thus, a ratio greater than 1.0 indicates that a median-income family earns more than enough to buy the median-priced house. In other words, the family could afford to buy a house priced above the median price. Thus, a higher index means the housing market is relatively more affordable.

The fall in the housing affordability index, besides being affected by the rapid increase in home prices, has also been affected by the slow growth rate in household income after the Great Recession. Historical low interest rates have played a significant role in maintaining relative home affordability in DFW, indicating that homeownership in the Metroplex region remains affordable if you can find a home to purchase. Still, new homebuyers have been squeezed out, given the low supply of smaller and lower-priced houses. Faced with rising prices and credit access constraints, fewer new homebuyers entered the market.

Multifamily Growing Faster than Texas

Multifamily housing construction permits slowed down in 2014, but picked up momentum at the end of the year and the first two months of 2015 (Figure 2). Multifamily permits in DFW surpassed 2008 levels in third quarter 2013 and have registered a more rapid growth rate than Texas multifamily permits. DFW has seen a migration influx from other parts of the nation.Microsoft Word - DFW Housing Market 2015.docx

The average apartment occupancy rate was around 97 percent in last quarter 2014, and the rental price per square foot was about 93 cents, continuing the positive trend after falling in the first half of 2009 (Figure 3). The high occupancy rate and rising rent prices are a consequence of the regional economic and population growth in the Metroplex. In addition, supply limitations for new single-family housing caused an increase in demand for multifamily housing.Microsoft Word - DFW Housing Market 2015.docx

Outlook: Constrained Growth by Supply

A growing DFW economy and strong population growth have stimulated demand for housing. However, supply constraints like limited lots, labor shortages, wage pressures and tight lending conditions have impeded new home construction. Historical low inventories are a consequence of insufficient supply of new home construction, resulting in rapid home price appreciation. So a combination of strong housing demand with supply limitations is giving way to moderate growth prospects for the DFW housing market in 2015. Single-family construction seems to be accelerating. If it can keep up with demand it can generate a more dynamic housing market in 2015. Also, in an atmosphere of strong U.S. economic growth, the headwinds that are tempering housing market growth could be lessened if access to credit improves for both developers and buyers, especially first-time buyers.

Dr. Luis B. Torres is a research economist with the Real Estate Center at Texas A&M University. Formerly with Mexico’s central bank, Banco de Mexico, Luis has expertise in monetary policy after serving four internships at the El Paso office of the Federal Reserve Bank of Dallas.

 

 

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