Category: Market Stats

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.

 

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.

 

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

 

 blmiers2 via Compfight

Houston’s real estate market is scorching hot. The latest statistics on Houston’s real estate market we’re released last Friday and I wanted to share with you some interesting highlights:

• Real estate sales rose for the 16th straight month. Higher sales were recorded in all price points except for properties priced under $80k. Any guesses on what the majority of properties are in that price range? (Hint: They’re owned by banks)
• Inventory of properties for sale is 4.7 months! That’s the lowest that statistic has been since 2002. The market is tight and sellers are back in the driver’s seat due to high buyer demand.
• Average and median sales prices are rising, too. So this isn’t the end of 2010 where sales were creeping higher because of lower selling prices.
• Foreclosure sales are down double digits: Now they account for 16% of sales when in January of this year they accounted for 28%. So if banks are holding the infamous “shadow inventory”, it must not consist of Houston properties.
• Last but not least, rentals of single family homes rose again while average rents remained high, although off July’s back to school record highs.

Market’s Impact on Real Estate Investors

The latest data is yet another indication that the strong Texas economy and its job creating prowess are contributing to a strengthening real estate market. But what does it all mean for real estate investors? How does it impact their quest to find quality investment properties? Well, if you’re a real estate investor of the “you make your money when you buy” variety that worships at the altar of “built in equity”, there will be scarcity in your future. Discounted properties won’t exactly be extinct but they will be so few and far between that competition will drive up prices eating up that precious equity that drew you there in the first place. The reason for this scarcity is that the owners of discounted properties are well aware of the new market reality as well. With inventories down to less than 5 months, first time home buyers fresh off the proverbial fence and primed to take advantage of ridiculous interest rates are scooping up the dwindling foreclosure inventories. After all they do have first shot at most foreclosures through protected first look periods. And then the scraps that are left over are fought over by aggressive investors trying to acquire as many discounted properties before the window closes completely.

If instead you believe that you truly make your money when you successfully execute a sound investment strategy over a long period of time (10+ years) as we advocate on this site, there are good news for you in these latest figures. First, the rental market continues to strengthen with rents holding strong at record levels. So if execute your Blueprint strategy and acquire well located properties that are new, newer or well maintained for a fair price, there will be a strong income stream to support the growth of your capital base through the aggressive pay down of the property’s mortgage. Second, in a tight market such as this one where demand dominates supply, prices rise which increases your internal rate of return exponentially. Last, as the wide majority of equity investors fight over a very limited supply of properties, you can pursue a fair deal in a calm and profitable fashion.

References: HAR Press Release 

Photo Credit: Jody Sticca via Compfight

Long term real estate investment strategies are founded upon the investor’s ability to secure continuous incoming rent over the term of the investment. That’s why the most frequently asked question by real estate investors has always been: How do I know the property will rent quickly and stay rented? In that spirit, I want to keep you updated on the state of the rental market in Houston Texas. Fresh off the Houston Association of Realtors presses:

Strong activity persisted in Houston’s lease property market in June. Rentals of single-family homes climbed 15.9 percent compared to June 2011 and year-over-year townhouse/condominium rentals increased 13.5 percent. Rents in Houston are at their highest levels ever, with the average rent among single-family homes reaching $1,641 per month in June and the average rent among townhouses/condominiums coming in at $1,408 per month.

Average rents reaching the highest level on record is not doubt good news. But what’s even better news is the drop in price to rent ratios that this causes.  High rents by themselves don’t guarantee that there will be cashflow. Look at New York – extremely high rents but they’re coupled with extremely high property prices that don’t allow the numbers to work. In Houston, you can purchase quality investment properties in good locations for 6-8 times annual rent. The true magic lies in the combination of affordable prices and increasing rents. That’s where a lot of investors miss the boat: They think it’s all about buying cheap enough properties. Actually, you can purchase a more expensive higher quality property where the price to rent relationship is much more favorable than in a lower priced property.

Rents are rising while opportunities for well priced quality assets are plentiful. That’s what makes the Houston market one of the hottest markets in the country to invest your hard earned capital.