"The intense focus on attracting non-oil-dependent businesses and, specifically, high-tech businesses, creates and sustains a resilient and multifaceted statewide economy."
The state of Texas has 10 distinct climatic regions and 11 distinct ecological regions, so it’s hardly surprising that the second-largest state in the union boasts hundreds of distinct housing markets. In fact, it’s far more common to find regional analyses than a statewide real estate analysis of Texas simply because the square mileage of the Lone Star State is so vast. A total of 696,200 square miles make the state significantly larger than several first world countries including France, Germany, and Japan. However, given the growing prevalence of a popular trend of defining the “new normal” for Texas housing as something other than cyclical, the time has come to tackle the state as a whole in addition to scrutinizing its individual markets.
According to Anil Kumar, an economic policy advisor at the Federal Reserve Bank of Dallas, “The Texas economy consistently grows faster than the nation…typically about one percentage point better [unless] there’s a serious oil price collapse.” Kumar went on to say he believes the state of expansion, growth, and economic leadership in Texas to be “the new normal” for the state, “as opposed to something that is approaching a correction.”
With two Texas housing markets taking the top two spots for “most overvalued housing markets” according to a 2017 report by Forbes, determining if the state of Texas has somehow created or evolved into a “new normal” of permanent growth and expansion instead of the conventional housing market cycle is a key concern for real estate investors. Local, national, and international players are attracted to the state by rising home values, relatively affordable land and costs of living (compared to comparable California metro areas, for example), and that above-average economy. However, if the time-proven axiom “What goes up must come down” is true in Texas, at some point the state’s biggest markets could be headed for a hard correction. Of course, if the “new normal” excludes market corrections, investors need to know!
Past Crashes Could Hold the Key to Future Market Performances
In the early 1980s, Houston, Texas’ oil industry was booming. In 1980, oil prices peaked at $35 a barrel, the equivalent to more than $100 a barrel today. Six short years later, however, those same barrels were selling for about $10 each, or just a little more than $20 each today. The oil glut is, in itself, a fascinating topic. For our purposes, however, its broad effects on the Houston and Dallas real estate markets and economies, in particular, and the state of Texas, in general, will be the most important facets of the discussion.
When oil prices started falling in 1982 and continued to do so for the next few years, Houston lost roughly one in every eight jobs (more than 225,000), posted unemployment rates higher than nine percent, and saw commercial real estate vacancy rates higher than 20 percent. Not surprisingly, the construction boom that the city had been enjoying in the late 1970s and early 1980s slammed to a halt, with partially completed skyscrapers commonly compared to skeletons dotting the landscape and skyline.
While Houston tends to be the first place most people think of when they think of an oil economy, the entire state of Texas was certainly affected by the oil glut in the 1980s in dramatic, negative ways. More than two decades later when oil prices began falling in 2014, analysts predicted that more than 200,000 oil workers would lose their jobs if prices did not recover, and they were right. Many of those job losses did hit Texas. The consequences were painful since average pay in the oil and gas industry is about 84 percent higher than the national average according to Goldman Sachs.
However, while oil certainly remains a very significant leg in the Texas economy, it is no longer the linchpin. As a result, the state’s overall economy, its housing market, and its major metro areas did not collapse in 2014 as they did in the early 80s, in large part due to lessons learned and changes implemented in the wake of that economic disaster. Furthermore, the same economic innovations that insulated the Texas economy in 2014 arguably protected it from the worst of the housing crash in the mid-2000s as well.
A Pattern of Deliberate & Effective Economic Innovation
Texas has, as a state as well as on many municipal levels, dedicated itself to preventing a repeat of the oil glut disaster by focusing heavily on attracting high-tech companies and their associated high-paying jobs and economy-boosting activity. That dedication to economic diversity is serving the state and those invested there well.
The intense focus on attracting non-oil-dependent businesses and, specifically, high-tech businesses, creates and sustains a resilient and multifaceted statewide economy. The Texas economy, with its entrepreneurial incentives, great tax benefits for individuals and corporations, and concerted initiatives to help commercial and residential property owners improve property values, remains steady, attractive, and flourishing. Below, we include a cross-section of major housing markets in Texas to create a more comprehensive view of this still wide open state and market.
Houston “The Bayou City”
Houston is the biggest city in Texas with a population of more than 2.3 million (2016 U.S. Census). Thanks to an economic evolution in the 1990s and early 2000s that largely insulated it from the national housing crisis and subsequent financial meltdown and Great Recession, the city boasts an industrial base in energy, manufacturing, aeronautics, healthcare, and transportation. Houston hosts 20 Fortune 500 companies, and its university system is dedicated to keeping graduates employed and residing in the area.
According to the University of Houston, more than 80 percent of the institution’s 12,500-member, annual, degreed graduating class remains in the area for at least five years after graduation, consistently adding to the population and making the area extremely attractive to businesses seeking employees with advanced education. That population is also ideally suited for both long-term renting and homeownership thanks to steady wages, opportunities for upward mobility in their employment, and a demonstrated desire to establish roots in the area.
Investor Insight: “The best aspect of the Houston housing market is that we see very slow, steady appreciation, even with major events like Hurricane Harvey (see sidebar on p. 41) or the foreclosure crisis,” observed Brian Spitz, owner and president of Houston-based Big State Homebuyers. “Over the course of time, the Houston housing market is very stable.”
Spitz added that he believes Houston has a “great deal of wasted space” that could be used for redevelopment. “These [lots] have the potential to be prime areas for commercial and real estate development,” he said, noting that this shift would necessitate the city government being “more proactive about condemning houses that are not in livable condition.”
Austin “Silicon Hills”
In July 2017, Forbes named Austin one of the “most overvalued cities in the United States,” citing a hot demand for housing in Texas’ capital city as the main source of analysts’ estimated overvaluation of 17 percent. Fitch Ratings analyst Samuel Ho pointed out in response to the findings that a label of “overvalued” does not necessarily mean that a city is in economic trouble, but rather tends to mean analysts believe “home prices are just growing too fast compared to the fundamentals” like wage growth, population growth, unemployment, and rental rates.
As if to counter the accusation of overvaluation, by Q3 2017, Austin-area builders had started 12.5 percent more homes than they did during the same period in 2016. This was the highest posting of housing starts in 10 years. Furthermore, in the extended metro area, new home starts were up 19.1 percent year-over-year in Q3 2017, with new home prices just under $290,000 and still relatively affordable compared to West Coast cities with similar job markets and a profusion of high-tech professionals, scientific experts, and technical services providers, many of whom are now migrating eastward to Texas.
“Our previous governor, Rick Perry, went out and solicited companies to come to the state of Texas and bring their headquarters, their sub-headquarters, and lots of jobs with them, which drove prices up everywhere when they relocated,” observed Cathy Crowe, a team leader at All Star Home Group Realty and 30-year veteran of the Texas real estate industry. “That hard work is one reason we are seeing these huge price increases across the state,” she added.
Investor Insight: “Austin closed out 2017 with a record-breaking year in the housing market, but there are many factors for investors to consider in 2018. The updated U.S. tax plan, slowing job growth, and increased costs of buildings supplies could lead to an overall slower 2018 market,” warned local realtor Pirie Humphries. However, investors should be aware a pending overhaul of the local development process called CodeNEXT “could allow for more opportunities for land development and potentially more affordable housing,” she added.
“Even in hot markets like Austin, housing retains relative value to more expensive markets and should remain attractive to new transplants,” said Investability Solutions CEO Dennis Cisterna. Investability provides a wide variety of services to the single-family rental sector in multiple markets, providing Cisterna with a comprehensive view of the national market and Texas’ place in it. Cisterna also offered a caveat: “There is always a ceiling to prices, no matter where you are. When the supply starts to outpace the demand, you’ll start to see a correction. It starts with prices flattening, continues with sales volume declining and ends with price reductions. That is starting to happen with luxury for-sale and rental product in high-density settings, especially when more affordable alternatives are nearby. I have seen some recent proposed developments in San Antonio and Austin that have me concerned they may be following a similar path, but that is only a small part of the market. Overall, I expect 2018 to be another banner year for the Texas housing market as a whole.”
Dallas-Fort Worth (DFW) “The Big D”
Since 2016, analysts have been placing DFW on the lists of most overvalued cities in the country and talking about housing market corrections in the area. And for many more years than that, DFW home prices have continued to rise. Since 2010, DFW values have risen more than 40 percent, thanks in large part to economic incentives and tax benefits offered both on state and local levels that have brought in a vast array of businesses in nearly every industry sector.
“When you look at the economy of DFW, it is the most beautiful pie chart you could ever see from an economic standpoint because we do not rely on anyone or even two or three things,” said Ryan Bowers, president of DFW-based Prime Properties Realty, a turnkey investment provider. For example, Bowers noted, although many people did lose their jobs during 2009 due to the financial crisis, those individuals did not flood the market and experience sustained unemployment to the same degree their counterparts did elsewhere in the country. “For example, near our office a huge Countrywide office closed, and all of those people were out of a job. Because our economy isn’t solely based on the financial industry, though, they were able in many cases to find work elsewhere,” he said.
At Bowers’ company, investors often purchase mid-level (B class) rental properties in areas of DFW that are likely to experience growth in the next five years or so. Rehabs and renovations tend to be slightly more focused toward retail buyers than toward renters even though the properties start out as cash-flowing rentals. Then, when prices rise sufficiently, investors sell before the local market levels out.
This shift toward higher-level upgrades and rehabs has been spreading across all levels of the DFW market, observed Blake Johnson, owner of Finishing Touches Remodeling and a regular on “Flip or Flop Fort Worth.” “The dynamics in this market are changing tremendously when it comes to the upgrades we’re doing in our rehabs,” he said. “What we are doing in a $120,000 house, for example, to bring it up to market standards is what we used to do for nothing less than a $150,000 home. We’re using higher quality materials and the work requires more skill.
“For example, we’re laying tiles in a brick pattern instead of just plain squares. With labor in our industry costing more everywhere, it definitely translates to more expensive renovations. We are also seeing more investors buying older homes from as far back as the 1940s or even the 1920s, and completely gutting them, modernizing them inside and out, and then renting them out or selling them for top dollar.”
Investor Insights: In DFW, Johnson noted that “higher-end” upgrades, even in rentals, now include fashionable granite counter tops (instead of laminate) and porcelain tiles, as well as redesigning interior layouts to create open-concept homes.
According to Think Realty Resident Expert Pamela J. Goodwin, founder and CEO of Goodwin Commercial, a boutique commercial real estate firm based in the DFW area, the stretch of land between DFW and the Oklahoma state line is ripe with opportunity for real estate investors. “Following the roads, whether it’s the interstate or the new toll road being built, is the best way to spot where new growth in commercial and residential is happening,” she said. “First come the homes; then comes the retail.”
Crowe, who is based in the DFW area, recommended local investors take a close look at their investment strategies before taking action, even if those tactics were successful in the past. “Local investors may still be in sticker shock that prices have gone up as fast as they have given how steady the DFW market has historically been,” she said, adding that rising insurance rates and property values are affecting CAP rates for many investors.
“More and more, we’re looking at out outlying areas, like Denison, Texas, where rent is affordable for our tenants and where investors with capital can get good value,” Crowe noted. “We recently sold 21 properties in Denison to a California real estate investor. They will probably have no trouble finding tenants who work in DFW to rent those properties. More and more people are accepting longer commutes to work. In fact, a lot of employers are starting to offer commuter pay to make working there more attractive.”
Crowe added that she does not believe DFW’s meteoric rise in home prices is finished, although she did suggest that prices might start a “slower spiral” later in 2018. Hear directly from Crowe and other Texas real estate veterans and experts at the Think Realty National Conference & Expo at the end of this month (see above for details).
San Antonio also made Forbes’ “most overvalued” list in 2017, with analysts projecting an overvaluation of nearly 19 percent despite median home values of just over $202,000. According to the San Antonio Board of Realtors (SABR), home sales volumes rose consistently throughout 2017 despite concerns that overvaluation might slow the market. SABR reported that in most areas, prices were rising, with average sales prices hovering around a quarter of a million dollars, but in the Travis County area north of the city, median prices fell in the last part of the year to about $340,000.
Zillow chimed in as well, indicating that San Antonio homes gained 7.1 percent in value over the course of 2017, translating to $125.4 billion. Renters in the area actually paid less in 2017, however, with rental rates falling by two percent in the city. Investors found that competition drove prices up in the metro area thanks in part to swiftly rising prices as more homebuyers entered the fray in an attempt to make a purchase before the end of the year. Local tech companies like USAA, a financial services company, and incoming tech companies like Dizzion Inc. (moving from Denver, Colorado) and Freedom Security Alliance (moving from the San Diego area), created significant additions to the local population of talented high-tech and IT professionals, many of whom drove up prices as they fought for homes.
Investor Insight: “The competition in San Antonio in 2017 was fierce,” said Mitch Stephen, owner of local investment group 1000Houses.com and author of the three-part series of books, My Life & 1,000 Houses. “Last year was one of the hardest years in my career to find homes in the San Antonio area. That being said, an astute professional can still find their share, and we were able to locate more than 77 properties despite the hot market,” he added. “Honestly, we are hoping for the market to cool in 2018!”
Hurricanes, Houston, Real Estate & Recovery
Brian Spitz, owner and president of Big State Home Buyers in Houston, had a front-row seat for one of the worst natural disasters to hit the Bayou City in recent years. He related his personal experience with real estate investing and natural disaster recovery as it happened in Houston after Hurricane Harvey.
“Whenever there is a market event like a flood, the people who buy and sell first get the most money. We have seen that to be true in Houston. Flooded-home prices have fallen in certain areas of the city because the people who would have been the most willing to buy those properties already bought what they need. Properties coming to the market now require a new segment of people to buy them as they decline in price, and it represents a rare opportunity for new investors to buy on the open market.
“It is very rare any time you can buy houses for 40 to 60 percent of their value, and only a natural disaster will push those prices down. Most investors are scared by the size of the remodel and the uncertainty of whether the Houston housing market will recover, but Texans are resilient, and Houston is a strong community. In a lot of local areas, it’s already recovering. These properties are a really good opportunity for new investors to enter the market and have equity.
“I advise investors to not be afraid to make offers. The critical piece is that you repair correctly. Go the extra mile to permit and inspect everything. Do everything possible to maintain the integrity of the house.
“On a broader note, I would say any market that has a stable level of growth and decline over the course of any given period of time, like Houston, for example, would be a market where a natural disaster would make for a good buying opportunity.”