Houston real estate market outperforms: Rents, sales and prices surge in 2012

Every month of 2012, Houston’s real estate market continued its gallop posting higher sales and prices each month year over year – usually by double digits. Most importantly – the statistic that never fails to put a smile on my face – rents continued to rise reaching their peak at the end of the summer for the back to school rush then maintaining high levels through the end.

At the bottom of this post, there will be a link to the Realtor association press release for those who want to peruse the whole thing. But there’s four numbers you really need to know that tell the whole story of 2012 and write the prologue for this year:

  1. The average rent for single family homes in Houston was $1552/mo – that’s a 3.1% increase over a good 2011.
  2. Sales of all Houston properties came in at 73,994 units  – that’s a 16.3% increase year over year.
  3. The average home price climbed to $225,000 – that’s a 5.4% increase from the previous year.
  4. Inventory at the end of December was at 3.7 months!Down 36% from 2011 (lowest level since 1999)

As we have pointed out in our previous updates on the state of the market, the real estate market’s strength was fueled by a solid local economy. According to The Economy at a Glance: Houston – a Greater Houston Partnership Publication:

The Houston-Sugar Land-Baytown Metropolitan Statistical Area added 85,300 net new jobs, a 3.2 percent annual increase, in the 12 months ending November ’12, according to data released in December by the Texas Workforce Commission. The private sector added 86,600 jobs, a 3.8 percent annual increase, during the same time frame. Houston continues to lead the state’s economy, with no other metro adding as many jobs.

Houston’s November unemployment rate was 5.8 percent, down from 7.3 percent in November ’11. Texas’ unemployment rate was 5.8 percent, decreasing from 7.2 percent in November ’11. The U.S. rate was 7.4 percent, a drop from 8.2 percent the past November. This is the lowest unemployment rate for Houston, Texas and the nation since December ’08. The rates are not seasonally adjusted.

To put that unemployment rate in perspective, that’s 1 percentage point higher than full employment so the Houston economy is definitely headed in the right direction.

As great as 2012 was for the Houston real estate market, many of you may be wondering what this might mean for the market in 2013. Fortune telling isn’t one of my strongest talents so I won’t even try. But we can look as some indicators that might shed some light on what’s to come especially as it pertains to real estate investors.

Interest Rates

The Federal Reserve intends to keep interest rates low through the end of 2014.  That’s if the economy continues to grow at a similar 2-3% per year pace. If there’s an acceleration in growth, the Fed (as we call them among friends) will have no choice but to raise rates to stave off inflation. Another interesting note here is that they plan to keep rates low – that’s doesn’t necessarily mean that they will be AS low as they have been in 2012. In fact, most economists predict that mortgage rates at the end of 2013 will be 0.5-0.75% higher than they were at the end of the previous year. And when most economists agree on anything, that’s really saying something. That rate increase may seem insignificant, but a half a percentage point increase in interest rate will cause the cash-on-cash return of a real estate investment to drop by 1%. It’s not the end of the world obviously – but if you had the option of choosing between getting a higher or lower return on the same investment just for pulling the trigger earlier…

Economy

When we try to assess what might happen to the local economy, we have to consider projections for the national economy as the two are intertwined. Quoting from that same Greater Houston Partnership publication:

Recent reports on U.S. gross domestic product (GDP) reflect an improving economy. Real GDP (i.e. growth once inflation has been factored out) increased at an annual rate of 3.1 percent in the third quarter of ’12, up from a tepid 1.3 percent rate in the second quarter…Houston receives an additional stimulus to its economy when U.S.GDP grows at a 3.0 percent or better annual rate. Slower growth doesn’t signify a downturn for Houston. Slower growth means that Houston must rely on the other drivers—energy and foreign trade—to create jobs in the region, which has been the case the past three years.

Most forecasters expect the uncertainty over U.S. fiscal policy to limit growth in the first half of ’13. If Congress makes significant progress by mid-year toward resolving the challenges, GDP growth should pick up. The consensus among NABE economists is for real GDP growth to reach 3.0 percent by the fourth quarter of ’13.

Provided that the national economy toes the expected line (or better), the Houston economy should continue to grow in 2013, creating more jobs, lower unemployment and higher demand for real estate (both to buy and rent) as a result.

Real Estate

The most telling indicator of the four numbers mentioned above is the inventory figure. Just over three and half months of inventory city wide indicates a very tight supply. If you doubt that’s true, just ask any Buyers who have been looking for a home in the last six months or so. They will tell you tales of frustrating bidding wars, multiple offers and pride-swallowing full price offers. Inventory levels that low almost guarantee rising prices in 2013. The good news for investors is that the Houston market likes its price increases slow and steady as indicated by a respectable 5.4% increase last year. If you sneer at that number, I invite you to remember that 4 years ago we didn’t drop by double digits like some markets, either. In my opinion, rents will continue to rise due to high demand from inward migration seeking good paying jobs. Sales will post a deja vu performance as well.

The King is dead. Long live the King. 2012 was great. 2013 will be even better for Houston’s real estate market.

HAR Press Release

 

Sure sign of Spring - Robin - Bird

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