Texas Real Estate Economic Data

TEXAS
REAL ESTATE ECONOMIC DATA

March 11, 2008

The current conditions in the US real estate market precipitated by the failure of many subprime loans to home owners have created financial problems for developers and builders. It has slowed the velocity of land transactions and the construction of houses and developed lots. The number of buyers of real estate competing for quality real estate investments has become extremely limited.

In Texas, the developing shortage in inventory of houses and lots will set the stage for price increases as financing for home buyers become more available. Increasing construction to meet the new level of demand will be operating in a market with shortages in both new homes and lots. The price increase will occur in housing, lots and land for new subdivisions.

The Texas land market is stable and few tracts are discounted. However, some developers and investors with debt obligations that are difficult to meet are presenting opportunities. This is the time for those with capital to move into the market and purchase tracts at a discount. For those that have good positions in property, it is a time to be patient because significant price escalations appear likely as the market settles back to normal

The housing market in the United States in 2007 and 2008 has been subjected to the worst financial crisis in more than 30 years. The precipitating cause was irresponsible management of the mortgage business by the financial institutions.

The result of subprime loans made to home buyers who were not qualified was a large number or foreclosures which created excessive inventory of homes on the market. In overheated markets, speculators were forced to put homes, held for investment, on the market; thus further increasing the inventory.

The financial problems among lenders have made buying a house with mortgage financing difficult. This has created financial problems for developers and builders and decreased the construction of new homes and the value of those homes on the market. Builders are selling their housing inventory at losses. They are suffering with reduced cash flow and dealing with debt obligations that are difficult to meet.

The lenders and the purchasers of mortgages in the secondary market have taken huge losses. The money available for new loans has been greatly reduced.

The foreclosures and inventory buildup in the housing market is focused mostly on starter homes, which is the group heavily financed by subprime lending. It is also focused on particular geographical areas of the US. However, the problem in the financial sector has impacted all housing negatively.

The decrease in home building will help reduce the excess of housing in the marketplace. It appears that home construction nationally will bottom out in the fourth quarter of 2008 at less than 1 million units per year. The peak of home building occurred in 2005 at approximately 1.8 million units.

All but 10 states have maintained a positive appreciation in house value through 2007 and into 2008. States with the greatest foreclosures and inventory excesses were those that suffered depreciation in home values. The states with the greatest depreciation were Michigan, California, and Nevada. The financial crisis affects all states. Most of the severe problems are in the 10 states showing depreciated values. These states had an overheated market with an unusual and unrealistic appreciation in home values over the last 3 years

Texas had an appreciation of 6.3% in house values for 2007. Its value appreciation in houses has been steady and at a normal sustainable rate. Construction also has been at reasonable rate and the inventory of homes stayed at a comfortable balance with absorption.

The Texas housing market is one of the strongest and most stable markets in the USA at this time. The evaluation of the Texas real estate and housing markets is done in the context of the USA as a whole. Employment and population are the driving forces creating the demand for real estate and homes. The supply of houses and other real estate elements compared to their demand effects construction rate and value changes.

In 2007, Texas job growth was 2.1% and lead the nation in both percentage growth and absolute number of jobs created. Job growth in the US was 0.9% in 2007. The job growth in Texas of 218 thousand exceeds Florida and California which had 86 thousand and 79 thousand respectively. Texas represented over 16% of total USA job growth in 2007.

Texas population grew over 3 million from 2000 through 2007 and again led the nation. Texas and California will lead the nation in population growth through 2030 according to the US Census Bureau. The growth for Texas is projected to jump from 20 million in 2000 to 33 million by 2030.

Houston had job gains in excess of 96 thousand in 2006 and in excess of 95 thousand in 2007. Houston led the state in 2007 in job growth and was followed by Dallas/Ft. Worth with 83.5 thousand, Austin with 30.5 thousand and San Antonio with 24.2 thousand. Both Houston and Austin had job growth rates of approximately 4.0% in 2007. Clearly, Texas and its major cities are having exceptional growth.

The median price home in Houston is $152 thousand while the median price in Los Angles is $ 589 thousand, Miami is $365 thousand and New York is 540 thousand. This difference in home costs is even more dramatic if the household income for each city is considered. The 2006 median household income for Houston was $57 thousand, for Los Angeles $62 thousand, for Miami $45 thousand and for New York $60 thousand. There is little difference in income with a large difference in home costs.

The affordability of housing and the low cost of living in Texas create an atmosphere to attract jobs and retain population. Thus the demand for real estate continues to grow.

Texas has a balanced housing and developed lot inventory. In Houston the inventory is 3 months for new homes and 6 months for resale homes. The average day on the market for resale homes is a reasonable 85 days. The vacant housing inventory in California is as high as 44 months. In Reno, Nevada the inventory is 13 months and is 12 months in Las Vegas.

Prior to the subprime lending crisis, Houston and the major cities of Texas had a comfortable to tight balance between construction, inventory and sales of homes. The lending crisis impacted sales and put additional homes in inventory. This caused the builders to reduce production.

Home construction in the US has fallen between 35% and 40% to date and will fall to approximately 50% in 2008. Construction should begin to recover in the US by the last quarter of 2008. California, Nevada, and some locations in Florida will recover later.

Home construction in Houston was down 25% in 2007 and is possibly going to continue to fall until mid 2008. Annual sales in Houston are significantly down in housing below $200 thousand but sales are ahead in housing above $200 thousand. Houston responded early to the housing slowdown. New housing starts have been less than sales in the Houston market since the end of 2005.

The impact on Texas of the housing slowdown as a result of the national financial crisis in the US will begin to correct by mid 2008. Extremely strong job growth and population growth over the last few years has continued to create demand for housing and other real estate and muted the impact of the inventory and financial issues.

The subprime crisis created several problems which affected the Texas housing market. It retarded mortgage lending in general for all price housing and had a strong negative impact on housing under $200 thousand. Loans to purchase homes are more difficult to obtain and required stronger credit and more equity by the home buyer. Many potential buyers, including those that were recently foreclosed, will reside in apartments until they have the credit or until loans become more available. This group will represent pent up demand that will ultimately add to the continuing demand from the strong job and population growth in Texas.

During this troubled time in the housing industry many National builders who were building in Texas came under huge financial pressure because of the problems in places like California and Nevada. They had to use their capital to support their business in the weaker markets and had to abandon or greatly reduce their programs in Texas. Their reduced interest in Texas construction and development meant that development of houses and lots would slow.

The slowdown of their Texas programs would further reduce available inventory. This is not a problem on the short run because demand in Texas has been reduced. The number of homes and developed lots will ultimately be reduced to a point where normal demand increase from future home buyers benefiting from better credit availability and greater market confidence will drive prices of homes, subdivision land and developed lots upward.

Additionally, the national builders will return to Texas with their old enthusiasm and buy land to develop lots or buy lots to build homes as their financial problems elsewhere are resolved.

The supply of available housing and lots for construction is becoming short in Texas. The demand will accelerate as the population increases and home loan availability again returns to a normal level. This will bring strong pressure in the marketplace for subdivision land, lots and new homes and should drive prices to higher levels.