Houston real estate market roars into spring + Introducing HIGR chart

It’s as if someone flipped a switch on January 1, 2013.

The market has not been the same ever since. During the previous two years (2011 and 2012) the  Houston real estate market reversed course and started its steady climb of recovery. Sales started to come in at double digit increases year on year and prices rose slowly but surely. Inventory levels were dropping but there was sufficient supply to serve the growing demand. Rental prices were rising as tenant demand soared in response to population growth and strong job creation numbers in Texas.

Real estate investors responded in kind by acquiring more properties to serve that demand. Up to this point, nothing out of the ordinary. After the slow and lethargic sideways market we experienced after the 2008 recession, the daylight of recovery came as expected. Until this January.

The consumer confidence that had been the missing ingredient for the robust recovery that ultracheap money should have created, was finally here. Job numbers started to look better as employers put behind the uncertainty of a three year old election campaign. Most people didn’t have to constantly worry if the next week could bring the dreaded pink slip. And it’s as if they looked around and realized that with mortgage rates this low, there would be no better time to buy in a very long time.

So, sales grew at an accelerated pace and carried prices higher with them. Bank owned properties made up an increasingly smaller part of total sales as the much speculated about “shadow inventory” never materialized. In addition, default rates of homeowners that bought after 2008 have been much lower than those who bought before. The reason is simple – 2006’s subprime mortgage became 2009’s 30 year fixed FHA loan with a low interest rate. And guidelines were tighter, so fewer people qualified. So fewer foreclosures in general have translated to fewer bank owned properties. Inventories struggled to keep up with the spike in demand and hit a 13 year low at a skimpy 3.6 months in January. Say hello to listings sold in a matter of hours with multiple offers and bidding wars. Bid adieu to negotiating leverage.

Houston Real Estate Market Report for February

February brought more of the same for Houston’s real estate market. Below is a distillation of the numbers for you:

  1. Homes sales were up 15.5% over same month last year
  2. Home prices (average) were up 9.6% year over year
  3. Inventory held at the lowest level since 1999 of 3.6 months
  4. Active listings for sale fell by 21% to 33,361
  5. Rentals of single family homes fell by 16% while prices were up 7% at an average of $1515

Introducing Houston Investment Grade Rentals (HIGR)

The monthly press release from the Houston Association of Realtors that covers the Houston market statistics does a pretty good job of providing great home sales and inventory data. They fall short in the rental market department which usually gets a one liner and not much else. Case and point:

Rentals of single-family homes fell 16.3 percent compared to February 2012 and year-over-year townhouse/condominium rentals were down by 4.5 percent.

That’s great but it’s hardly enough information to make a good decision regarding the state of the rental market in Houston. For instance, without knowing the number of rental listings active on the market at the beginning of the month it is impossible to determine whether the drop in number of properties leased is due to a lack of demand or lack of inventory. Or for that matter, excess of inventory.

So, since I was tired of wondering, I built a chart that better indicates the state of the rental market for investment grade properties. For this purpose, I pulled data from the MLS for rental properties that meet the following criteria:

  • Single family homes
  • Located in good school districts
  • Built after 1990
  • At least 3 bedrooom and 2 car garage
  • Square footage between 1300-3000 SF

So far, I’ve collected and aggregated data going back to 2007 but I plan on extending it to 2003 to give you a 10 year birdseye view. The idea is to take a focused look at what the rental market is doing for investment grade properties that our clients are mostly interested in.

chart_2

 

Below is the summary of data for February 20013:

  1. Investment grade properties leased: 490 (that’s 2% lower than 2012) 
  2. Average lease price for investment grade properties: $1492 (represents a 5% increase over last February)
  3. Average days on market for investment grade properties: 29.44 (down 28.49% year over year)

At this point we don’t have active listing data for the month of February but starting in March we will start collecting it and reporting it here on our market reports posts in the coming months.

Parting thoughts

As far as the acquisitions market is concerned, the biggest risk to real estate investors at this point is nostalgia. What we used to be able to buy properties for in 2010-2012 is irrelevant for all practical purposes. Even more useless is waiting for prices to go back to that level when they’re going in the opposite direction. If you get hung up on nostalgia you might end up like those homeowners who won’t refinance their 6% a year mortgage down to 3.5% because rates dropped to 3.25% for 15 minutes four months ago. If nothing else, the current market reality is proof that timing the exact bottom is a fool’s errand. Pay a fair price for quality properties in the path of growth as long as the numbers make sense.

If I had to guess about the reasons behind the fewer rental properties leased in February, I’d have to go with two main ones. The first is that real estate investors are finding it harder to acquire investment properties in an environment where homeowner demand for properties is spiking. Remember that most homeowners have an advantage over investors due to the preferential treatment afforded to them by first look periods. The second reason is that during 2012, we started seeing longer term leases being signed by tenants. In fact our average lease term was 2 years in 2012. So as fewer properties come up for renewal, there are fewer listings on the market for lease. I don’t believe the drop reflects a symmetrical drop in tenant demand. If it did, the rental prices wouldn’t rise and days on market wouldn’t drop.

 

Comments

  1. Clearly this look like a sellers market, at least in Houston. Would you recommend waiting to purchase an investment property there since the rise in prices pushes down the ROI?

    • Hi Glenn

      Great question.

      Houston has been in Seller’s market territory for almost a year and a half. What’s happening in the last quarter is a knee jerk reaction to an acute supply crunch. This is already leading to an increase in new home construction as Builders seek to seize the opportunity and fill the demand.

      The answer to your question is twofold. Rising prices do put downward pressure on returns – if rents don’t rise accordingly. In the Houston market rents have been rising steadily for over 6 years without being met with a corresponding price increase. Now prices are rising but there are years of pent up rent increases to soften the effects.

      And second, return isn’t the only consideration. Time is a much more powerful factor. If an investor is in their late 40s, what makes more sense – to wait a decade so they can hit their return number or to assemble their portfolio now so when they reach retirement they have enough assets to work with to generate the income they need. Interest rates are another crucial consideration. If prices 5 years from now are indeed lower but rates are much higher isn’t that a wash (or worse) as far as the return is concerned?

      Long term investing is not a bargain hunt but rather a methodical acquisition of assets within the alloted timeframe for investing.

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