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Dallas-Fort Worth: The Heat is (Still) On

Investing Opportunities Abound in Dallas-Fort Worth, as the Area’s Economic Base Continues to Diversify.

When a city starts making regular appearances on multiple “overheated housing market” lists, real estate investors start to get a little antsy about their holdings in the area. Those who were considering putting money into those markets grasp their checkbooks a little more tightly.

In the case of the Dallas-Fort Worth area of Texas, those patterns have been emerging for a while, thanks to constant mentions from industry data giants that the region must melt down at some point after its recent meteoric housing rise. However, all signs indicate there is no meltdown in the immediate future.

If you examine the actual source of the area’s 40 percent increase in home prices since the Great Recession, you will see that Dallas-Fort Worth’s economy shows evidence of some pretty remarkable adaptions, which will likely circumvent a housing meltdown.

MOVING FORWARD: PUTTING OIL PARTIALLY ASIDE

Historically, the Dallas area economy has relied very heavily on the oil industry for its health, and as oil prices fluctuated, so did the local economy. However, those fluctuations tend to occur with a substantial lag, meaning that if oil prices fell (or rose) significantly, the aftereffects in the local economy and specifically in the housing market could take as many as 24 months to manifest.

This is good news for investors they have plenty of time to respond to changes in the economy. It has also been good news for the entire Dallas-Fort Worth area since there often is no major fallout at all if oil prices recover rather than trending downward and staying there. Furthermore, Dallas’ active and dynamic economic policymakers have used this lag time to insulate the city from oil-related downturns.

When oil prices began falling in 2014, the entire state of Texas found itself in the crosshairs of housing analysts, economists and various media “talking heads” as myriad industries attempted to forecast what negative effects the trend would have on their specific market sector.

OIL PRICE DROP FUELED  SOME CONCERN

There was certainly cause for concern. While the majority of Americans enjoyed paying less at the pump, about 250,000 oil workers (about half of that population at the time) lost their jobs. Companies went bankrupt as oil-rig operations and oil-related exploration and production shut down. And multiple major U.S. corporations lost their AAA credit ratings. States that relied heavily on the oil industry to bolster their economies faced serious issues, and Texas certainly was on that list.

Many regions were—and, in some cases, remain—wholly dependent on the oil industry for economic health. But the Dallas-Fort Worth area was not entirely reliant on the industry for growth and has actively expanded its economy to attract and retain technology companies over the years. In fact, 43 percent of all high-tech workers in Texas now work in the Dallas-Fort Worth area, and 13 privately held companies with at least $1 billion in annual revenue also are headquartered in the area or nearby.

HIGH TECH TO THE RESCUE

With technology jobs come housing appreciation and growth, and that trend continues to hold with Dallas-Fort Worth housing prices rising at nearly twice the national average. State and local programs intended to incentivize corporations to move into the area also played a major role in high-tech population growth, and Dallas has even been dubbed the “Silicon Prairie” for its ability to lure West Coast companies away from their pricey California headquarters and into the northeastern region of the Lone Star State

So does this mean that real estate investors can safely shrug off warnings that the Dallas-Fort Worth market is overheated? These doomsday forecasts can certainly be taken with more than a few grains of salt. However, understanding where demand is going in the area will help investors make solid strategic decisions about their money in this market.

Frank Nothaft, chief economist at CoreLogic, said recently that he expected the area’s housing appreciation to slow over the next 12 months as interest rates potentially rise and more homes are offered for sale in the area. This plateau trend is already evident in higher-priced Dallas neighborhoods, where home prices are up “only” about 10 percent year-over-year and transaction volumes are actually falling. In mid- and lower-priced neighborhoods, home prices were up about 24 percent year-over-year at the end of Q2 2016, indicating that the luxury end of the market, at least, is already cooling.

Overall, the area’s inventory is at less than a two-month supply, which means serious bidding wars for properties. That is likely to induce more homeowners to consider selling and possibly increase the amount of available inventory, particularly since local homebuilders are finding it increasingly difficult to produce new, lower-priced homes (those under $350,000) on the necessary scale. They continue, however, to produce higher-end homes, which will likely continue to slow the luxury market in the area.

WHERE TO INVEST

Carl Dean, a local investor and chief operating officer of American Real Estate Investments (AREI), said that in his opinion, some of the best areas for investing in the Dallas-Fort Worth market are actually in South Dallas, which is generally considered to be “less popular” than the northern Dallas neighborhoods.

“I see these areas in South Dallas and the surrounding areas of Fort Worth to be great cash-flow investments,” he said, adding that “high prices and high taxes” often lead him to avoid the northern neighborhoods. Dean also noted that Texas as a whole snagged nearly a third of the $166 billion spent on capital investments in the U.S. last year, with Dallas’ economic master plan ideally situating the city to create non-oil-related jobs, further diversify the workforce and continue to stabilize the economy in the future.

“The only major red flag that I think would affect the Dallas-Fort Worth or the Texas economy would be the national debt and the overinflation of our dollar,” Dean concluded, pointing out that this would be a national issue rather than a state one. The state of Texas recently passed a bill to open its own gold and silver bullion repository, likely in response to this looming national issue.

During the Great Depression, Dallas withstood much of the worst of the economic disaster by becoming the financial center for the oil industry. A few decades later, the invention of the integrated circuit by a Texas Instruments engineer set the stage for the region to begin diversifying away from the oil industry. Today, the area continues to actively introduce and refine policy to not only develop the commercial community, but to deeply involve local business presences in community development as well.

This extreme awareness and active response to the state of the local economy will serve not only the city and region well, but investors in the area also.